Novum Alpha - Daily Analysis 18 November 2021 (10-Minute Read)
Investors are grappling with the risk that the Federal Reserve will taper asset purchases and hike interest rates more quickly than expected to fight price pressures.
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A terrific Thursday to you as stocks take a turn for the worse on inflation fears.
In brief (TL:DR)
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In today's issue...
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Market OverviewInvestors are grappling with the risk that the Federal Reserve will taper asset purchases and hike interest rates more quickly than expected to fight price pressures.
Traders are also waiting to see if President Joe Biden picks incumbent Jerome Powell or Lael Brainard as the Fed chair nominee.
In China, earnings from Alibaba Group Holding Ltd. will provide a window into the impact of Beijing’s regulatory curbs.
In Asia, markets were mixed Thursday with Tokyo's Nikkei 225 (-0.80%) and Hong Kong's Hang Seng (-1.35%) down, while Sydney’s ASX 200 (+0.12%) and Seoul's Kospi Index (+0.02%) were up slightly.
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1. Central Bankers Warn of "Exuberance" Investors Couldn't Care Less
In a 1996 speech addressing the burgeoning internet bubble in the stock market, then-U.S. Federal Reserve Chairman Alan Greenspan popularized the term “irrational exuberance” to describe the unfounded optimism that lacks a real foundation of fundamental valuation.
The dotcom bubble would burst five years later.
Yet every bubble had its foundation in central bank policy. Years of loose monetary policy paved the way for a hunt for yield, leading to excessive valuations, a subsequent and sharp correction, an economic downturn, the fortunes of which are revived again by dovish policy.
Rinse and repeat.
And now the European Central Bank is warning of similar conditions of “exuberance” in housing markets, junk bonds and cryptocurrencies, creating vulnerabilities that will be exposed if higher than expected inflation lead to a sharp rise in interest rates.
So in other words, investors should have anywhere between three to five years before the bubble bursts, at least that’s what the empirical evidence would suggest.
While this year’s rebound in the eurozone economy has reduced short-term risks to the financial system, the ECB is concerned it’s baked in longer term risks, in its biannual financial stability review, noting,
“Concerns particularly relate to pockets of exuberance in credit, asset and housing markets as well as higher debt levels in the corporate and public sectors.”
Soaring inflation and failing real interest rates have forced investors hungry for yield to take greater risks, and the ECB has warned that parts off the property, debt and cryptocurrency markets are “increasingly susceptible to corrections.”
The irony is that for years, central bankers had been ruing the absence of inflation in their economies, and now that it’s finally arrived, they claim there may be too much of it.
In October, eurozone inflation hit a 13-year high of 4.1%, above the ECB’s 2% target.
While the U.S. Federal Reserve has long said that it could tolerate higher than targeted inflation in some years to make up for lower inflation in earlier years, the ECB has been less sanguine.
Nonetheless, the ECB is predicting that inflation will fall back below target in the next few years and importantly, did not expect to raise rates next year.
For investors, that means only one thing – it’s off the races.
So long as central banks shy away from raising rates, there’s no telling how big these bubbles (if any, likely many) can go.
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2. China Huarong's Bailout Could Presage China Evergrande Group's
Embattled China Huarong Asset Management plans to raise as much as US$6.6 billion by selling shares to a group of state-backed investors and stated that it will divest more assets as it unveiled long-awaited details on a rescue package to keep the troubled bad-debt manager afloat.
In what could be a blueprint for a potential bailout of highly-leveraged real estate giant China Evergrande Group, China Huarong Asset Management will sell over 41.2 billion shares to investors at a 23% premium to the last closing price before its stock was suspended on the Hong Kong Stock Exchange.
But unlike China Evergrande Group, China Huarong Asset Management is state-owned, and the capital injection in the latter, while subject to shareholder and regulatory approval, will end months of speculation over the firm’s dire situation and the willingness of Beijing to support state-owned borrowers.
Huarong’s bonds have recovered most of their value since late August and so far paid its coupons on time, but its ability to continue doing so in the long run rests heavily on how much cash it can raise from asset disposals.
China Evergrande Group meanwhile has plans to sell off its entire stake in HengTen Networks Group, taking a haircut of over US$1 billion as it works to pay off debt.
Meanwhile state-owned developers are rushing to the rescue of cash-strapped local governments in China, by stepping to the fore at land auctions previously dominated by private sector groups like China Evergrande Group.
As time runs out for China’s second largest real estate developer, both China Evergrande Group and its founder are rushing to sell assets to raise enough cash to pay off both onshore and offshore bonds, with its total liabilities estimated at US$305 billion.
Beijing has so far maintained a stony silence with respect to the fate of China Evergrande Group, but some observers have suggested that behind the scenes, the real estate developer’s founder has been persuaded to try and sell as many assets as possible to “demonstrate sincerity” making it politically more palatable for a bailout by Beijing if necessary.
China Evergrande Group’s ultimate resolution may look somewhat akin to that of China Huarong Asset Management, where a consortium of state-backed investors carve up the real estate developer, complete the projects that were due to be complete and enter into some form of restructuring with creditors.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...
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3. Bitcoin's Oldest Hack Could Finally be Resolved
There may finally be light at the end of the tunnel for victims of one of cryptocurrency’s most infamous exploits – the Mt. Gox hack.
While strictly speaking not a hack, the private keys for one of the world’s first bitcoin exchanges Mt. Gox, had been stolen and the wallets holding (at the time) hundreds of millions of dollars’ worth of bitcoin, emptied out.
A stark reminder for cryptocurrency investors that if you don’t hold your private keys, you don’t hold your cryptocurrency, victims of the Mt. Gox hack soon found that out the hard way.
Since the 2014 hack of Mt. Gox though, bitcoin has gone through an incredible rally and the bitcoin that was left in a handful of wallets at Mt. Gox is now worth many times the dollar value of the hack at the time.
Creditors of Mt. Gox are getting close to receiving reimbursements under a plan that has become final and binding according to a letter yesterday from the Japanese trustee of Mt. Gox, but details of the specific amount of the repayments have yet to be announced.
Although the absolute amounts of bitcoin are a far cry from the amount that was stolen in the Mt. Gox hack, their dollar value has soared, with an estimated US$8.5 billion available for distribution, from what was a US$445 million exploit at the time.
One of the world’s biggest bitcoin exchanges at the time until the hack forced it to close in 2014, after losing the bitcoin of thousands of users, investigations later revealed the shocking lack of basic cybersecurity and digital hygiene at Mt. Gox.
The Japanese trustee holds 141,686 bitcoin as well as some cash and Bitcoin Cash, according to earlier documents, a far cry from the 850,000 bitcoin that was stolen at the time, which would today be worth north of US$51 billion.
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Nov 18, 2021