Novum Alpha - Daily Analysis 12 November 2021 (10-Minute Read)
Global stocks are set for their first weekly drop since early October, hurt by signs that price pressures are broadening out beyond pandemic-related disruptions.
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A fantastic Friday to you as markets find their footing again.
In brief (TL:DR)
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In today's issue...
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Market OverviewGlobal stocks are set for their first weekly drop since early October, hurt by signs that price pressures are broadening out beyond pandemic-related disruptions.
But swings in equity indexes pale in comparison to bond market ructions, raising the question of whether stock investors are too sanguine.
Elsewhere, President Xi Jinping delivered the first doctrine on Communist Party history by a Chinese leader in 40 years, giving him a mandate to potentially rule for life.
In Asia, markets rose on Thursday's morning trading session, with Tokyo's Nikkei 225 (+1.14%), Hong Kong's Hang Seng (+0.49%), Sydney’s ASX 200 (+0.92%) and Seoul's Kospi Index (+1.43%) all higher amid a climb in Chinese technology stocks.
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1. How did economists get inflation wrong?
With headline inflation over 5% for six months now, saying that price pressures are transitory almost seems flippant.
On Wednesday, the U.S. Bureau of Labor Statistics revealed that Consumer Price Index data rose by 6.2% from a year ago, the fastest rate in over 31 years.
Even taking out volatile components of CPI like food and energy, prices in the U.S. still rose by a staggering 4.6%, thanks in large part to a demand for used vehicles as America gets underway again, with pandemic restrictions lifting.
While inflationary pressures are not altogether surprising, economists, on whom businesses and governments rely on to forecast inflation, have had an increasingly tough time with their projections.
In what has seemed like an endless game of catch up, economists have had to constantly and continually ratchet up projections for consumer price growth, and undershooting each time.
Exacerbating the challenge has been so-called base effects, which distort inflationary measures.
Because of the pandemic, prices, which were coming off of a very low base, would give the impression of inflation, and economists needed to account for that in their calculations as well.
Nonetheless, U.S. Federal Reserve Chairman Jerome Powell and senior officials at the central bank have maintained that inflationary pressures will ultimately prove transitory, and is there some method to their apparent madness?
Perhaps.
Whilst it is tempting to look at headline inflation data of the past six months and declare that runaway inflation is here, the reality on the ground is far more nuanced.
Supply chain pressures are real, but they’re unlikely to prove indefinite.
China, the factory to the world is facing an energy crisis of its own making and has banned heating coal imports from Australia, because of disagreements regarding whether or not Covid-19 was manufactured in the Middle Kingdom as well.
Factories in China are not operating at full capacity and brown outs are common.
Resurgent Covid-19 outbreaks in China also mean that what goods do get manufactured, don’t have the manpower to put on ships.
And where ships are available, a shortage of seamen and vessels (many were laid up because of the pandemic) means that shipping times are longer and costs are higher.
All of this is a function of the demand and supply curve and right now, demand is exceeding supply, which is what is leading to inflationary price pressures.
The bigger question that investors need to ask themselves now is whether or not they believe that these problems won’t get sorted?
Will China really never go back to reopening its factories and risk the necessary social unrest that will bring? Probably not.
Will shipbuilders stop making cargo vessels in response to that demand? Unlikely.
And will the pandemic leave us rooted to our homes indefinitely? Again, no.
So from that perspective, the Fed’s even hand is probably the right course.
Last week Powell reiterated that he won’t even begin to entertain interest rate increase until the labor market heals further, even if inflation runs hot for months.
It’s important to remember that for policymakers, their timelines run in years and not months.
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2. Musk Makes Magic by Selling Tesla Stock
As every seasoned magician will tell you, the key to the con is to keep the audience focused on something else, while the illusion is being prepared elsewhere.
And while Tesla CEO Elon Musk was distracting investors with tweets about everything from dog-themed cryptocurrency to taking a poll over whether he should sell some of his stake in the electric vehicle maker, he was already performing his market magic.
On Wednesday, regulatory filings revealed that Musk sold nearly US$5 billion worth of Tesla shares in the first three days of this week, after promising he would cash in 10% of his stake if egged on by Twitter users in a poll.
But since that tweet on Saturday, the Tesla and SpaceX CEO has gone silent, but one thing that does scream volumes is that at least some of this week’s Tesla share disposals by Musk have been on the cards for months.
Regulatory filings reveal that over 20% of the shares sold by Musk this week, or around US$1.1 billion, had already been set in motion when he adopted a blind trading plan in September.
Known as a 10b5-1 plan, it is often used by executives to avoid suspicions of insider trading and is frequently used to spread sales over a period of time.
Filings covering the subsequent sales on Tuesday and Wednesday did not specify whether they had been made pursuant to a similar blind trading arrangement, but they are more likely than not to have been as well.
The con is that by tweeting about a poll and then selling his stake, Musk is giving his Twitter followers, who may not necessarily be reading these regulatory filings, or know about the blind trading plan, the mistaken impression that they have far more influence over his actions than they actually do.
In a similar fashion, Musk’s tweets which have been known to lift or dump the price of bitcoin, have in recent times had similar effect on the price of Tesla.
Musk’s twitter poll saw the price of Tesla fall by as much as 12% at one stage, before recovering to shed only 4.8% of its value and taking the S&P 500 along with it for the ride.
Musk had previously said that he expected to sell a significant part of his Tesla stake to cover the taxes that will fall due on tens of billions of dollars’ worth of stock options that have to be exercise by next August.
Monday’s transactions revealed that Musk had exercised some of those Tesla stock options, adding stock worth about US$2.3 billion by the close of trading, but his use of Twitter to mess around with the price of Tesla is almost certain to invite fresh scrutiny from the U.S. Securities and Exchange Commission.
In 2018, Musk entered into a settlement with the SEC, when he tweeted that he had secured funding to take Tesla private.
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3. Bitcoin Bolsters its Chops as an Inflation Hedge
With inflation on the tips of tongues of economists and investors, it would reason that many are now starting to scrutinize bitcoin, which has burnished its inflation-hedging credentials to determine how well it has fared or been faring.
On Wednesday, just as U.S. CPI data saw prices rise at their fastest rate since 1990, bitcoin rocketed to a record high?
And while correlation does not imply causation, for many investors, that bitcoin spiked on rising inflationary pressures is no coincidence and something which they have foreseen for a long time now – that the cryptocurrency makes for a great hedge against a rising prices.
The argument is elegant in its simplicity – with just 21 million bitcoin that will ever exist, bitcoin falls within that small class of assets which is alleged to be deflationary, algorithmically designed to have a limited supply not at risk of debasement or devaluation by a central bank or government.
But theory needs to be tested and the easiest way to do this is to plot U.S. prices against bitcoin, which is exactly what Bloomberg Opinion’s John Authers did to discover that bitcoin shows a deflation of roughly 99.996.
In other words, what cost one bitcoin a decade ago, would now cost 0.004 satoshis, the smallest unit of the cryptocurrency that now trades around US$64,000 at the time of writing.
Bitcoin’s inflation hedge credentials have been burnished for as long as it’s been around and was touted as its reason for being in the aftermath of the 2008 financial crisis.
That inflation-hedge narrative has gained traction in recent months as the prices for everything from food to energy, housing to holidays have advanced faster and proved sticker than economist forecasts.
Macro hedge fund investors like Paul Tudor Jones were one of the first on Wall Street to cotton on to bitcoin’s potential inflation-hedging properties, but more are joining the ranks.
MicroStrategy’s (+0.25%) Micha
Some economists at Bloomberg Economics estimate that at least half of bitcoin’s recent returns can be explained by its inflation hedging credentials, with the rest stemming from market exuberance and momentum trading.
But calling an asset an inflation hedge does not automatically make it so.
Even gold has acted as a hedge against inflation when viewed from the lens of history and using data spread over centuries, for shorter durations however, an asset’s inflation credentials can be misleading at best, and misunderstood at worst.
To be sure, what matters more is correlation and right now, bitcoin appears to be moving up alongside prices.
Because there is no link between bitcoin’s supply and central bank policy, that lack of correlation makes it useful to act as ballast in a portfolio, regardless of its inflation-proofing credentials.
And although bitcoin’s price is very volatile, over the longer-term, inflation is not.
Perhaps more significantly, bitcoin has borne a strong correlation with stocks and other risk assets, which is really what investors should be keeping their eye on, inflation hedge or not.
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Nov 12, 2021