Novum Digital Asset Alpha – Daily Analysis 21 August 2020 (8-Minute Read)

Finally it’s Friday and I hope that you’re having as fantastic a Friday as the fabulous markets. 

In brief (TL:DR)

  • American stocks edged higher on Thursday on the back of a surge in tech stocks, with the S&P 500 (+0.32%), tech-heavy Nasdaq Composite (+1.06%) and blue-chip Dow Jones Industrial Average (+0.17%) all up. 
  • Asian stocks took their cue from Wall Street and opened higher. 
  • U.S. 10-year Treasuries rose, as yields slid to 0.653% from 0.665% in the previous session (yields generally fall as prices rise).  
  • Oil was more or less unchanged with WTI Crude Oil (Nymex) (+0.14%) at US$42.58 from  US$42.52 a day earlier. 
  • The dollar slipped slightly in Asian trading, with traders speculating that poorer-than-expected jobs data out of the U.S. will spur Congress to issue a fresh round of coronavirus stimulus. 
  • Gold edged down slightly with Gold (Comex) (-0.33%) at US$1,952.20 from US$1,958.70 in the previous session. 
  • Bitcoin (+0.48%) edged higher together with tech stocks and now trades at US$11,866 (GMT 0200) from US$11,750 the day before, with increasing evidence that investors are taking the opportunity to buy and hold and outflows from exchanges continuing to far outpace inflows (outflows typically suggest that Bitcoin investors anticipate greater price appreciation for Bitcoin). 

In today’s issue…

  1. Tesla Tears Up Traditional Tests For Valuation – But is it overpriced?
  2. Trump’s Tariffs Could Trigger Inflation In A Hurry 
  3. While Beijing Was Banning Bitcoin, Chinese Were Transferring Tether

Market Overview

No job? No problem. 
At least that’s what markets seem to have been saying yesterday as investors shrugged off higher than expected unemployment claims out of the U.S. and sent stocks higher. 
Gains were led primarily be tech stocks as investor appetite for internet and software companies remains insatiable, with solid balance sheets and a suite of products and services that benefit from social distancing, helping tech extend this year’s surge. 
Despite concerns over lofty valuations, tech companies continue to do well, bolstered by solid cashflows and the rising real holding cost of bonds.  
Asian markets responded in kind to Wall Street’s overtures with Tokyo’s Nikkei 225 (+0.41%) Seoul’s KOSPI (+0.57%), Hong Kong’s Hang Seng Index (+0.39%) all up, while Sydney’s ASX 200 (-0.07%) was only marginally down. 
Beijing has confirmed plans to talk with U.S. trade officials soon to review progress on a preliminary deal, a rare engagement between the world’s two largest economies and a welcome respite from escalating tensions. 
For a Friday, things couldn’t be better. 
Happy hour anyone? 
It’s not just Tesla stock that’s getting high. 

1. Tesla Tears Up Traditional Tests For Valuation – But is it overpriced?

  • Tesla stock hits new record high as it nears an impending stock split that investors are betting will lead to another retail-charged rally of the electric automaker’s stock 
  • Tesla’s valuation expensive by more traditional measures such as price-to-earnings, but low fixed income yield has made stocks relatively less expensive to hold relative to bonds and may be fueling Tesla’s role in a portfolio as a growth company stock 
Like a veblen good, the more expensive Tesla (+6.56%) gets, the more investors can’t seem to get enough of it.
Yesterday, Tesla’s stock crossed the US$2,000 mark and now trades at over 10 times what it was trading at this time last year, closing at an all-time high of US$2,001.83. 
This brings Tesla’s valuation up to US$373.1 billion, not bad for an automaker that delivered just 368,000 vehicles last year.
By way of comparison, the world’s largest automaker, Volkswagen ( -1.07%), delivered over 10.8 million vehicles last year and has a market capitalization of US$86 billion. 
But comparing Volkswagen to Tesla, according to some investors at least, is like comparing Dom Perignon to grape soda – they’re not even in the same product category, let alone class. 
By traditional metrics of valuation, Tesla’s not expensive, it’s daylight robbery. 
But by other measures, there may be some method to Tesla’s valuation madness. 
Given that bond yields are so heavily depressed, in real terms, stocks don’t look nearly as expensive relative to bonds. 
Which by that logic means that the holding costs of tech stocks like Microsoft (+2.33%), Facebook (+2.44%), Amazon (+1.13%), Google (+2.21%) and Apple (+2.22%) can be viewed as “safer” holdings, while more speculative bets like Tesla can be viewed of as precisely that – a risk-on wager for the future. 
But what a wager Tesla is. 
At a price-to-earnings ration in excess of 700, investors are implying that they are willing to pay US$700 for every US$1 of Tesla’s earnings. 
Expensive? Absolutely. 
But contextually, perhaps slightly more nuanced. 
Investors, for now at least, are willing to bet on Tesla’s future prospects (and earnings potential) and are willing to pay a premium for the electric vehicle maker. 
Add to that that Tesla’s impending stock split that will make it cheaper so that even more retail investors can take a bet on it, and as predicted by this newsletter earlier
, Tesla will likely see a short term bump in its stock price. 
After that is anybody’s guess, but once the stock splits, it would be surprising if there wasn’t just a little bit of profit-taking immediately thereafter that could see a pullback in Tesla’s price. 
And given how much Tesla’s recent run-up has been fueled by retail investors using slick zero-fee trading apps like Robinhood and SoFi, the correction could be swift and sharp. 
So investors looking to bet on the zero to hero stock price of Tesla should be wary that just as the acceleration in an electric car can feel almost instantaneous, it’ll still make the same mess as any other car when it runs into a brick wall. 
That face you make when you’ve been told you sparked off inflation. 

2. Trump’s Tariffs Could Trigger Inflation In A Hurry

  • Loose monetary policy has thus far avoided inflation because of highly optimized global supply chains that deliver goods cheaply to developed markets
  • Trump tariffs if re-elected could force American firms to re-locate production back to the U.S. with heightened costs being passed on to the American consumer and possibly spark inflation 
To walk along the port of Shenzhen is to take a tour of just how far globalization has come (and also how much China has benefited from it). 
All across the globe, factories have been tooled to make specific components that will ultimately be shipped to other parts of the world for final assembly and then sent to their respective markets and Shenzhen’s bustling port reflects the evolution of globalization. 
Along the docks are containers from and headed to everywhere. 
The global supply chain and highly optimized manufacturing processes have allowed Americans and other developed markets to enjoy goods and services far more cheaply and a quality of life far beyond what would otherwise have been possible had production been moved closer home. 
Yet listening to U.S. President Donald Trump’s threats to tariff American companies that refuse to move jobs back to the country from overseas, is like listening to someone who completely has no idea about how global supply chains work and just how much America benefits from them. 
At a campaign event in Pennsylvania, Trump cawed, 
“We will give tax credits to companies to bring jobs back to America, and if they don’t do it, we will put tariffs on those companies, and they will have to pay us a lot of money.”
“So what are they going to do? They are going to bring the jobs back.”
Maybe, but in reality what it’s more likely to do though is import inflation. 
Whether its tariffs or relocating factories, the final cost of the products that these American companies make will ultimately increase. 
And while inflation has been kept at bay in the over a decade since the 2008 financial crisis, much of that has been due to the smooth operation of highly optimized global supply chains and low barriers to trade. 
The Trump administration’s simplistic (and misguided) worldview of how global trade works is reflected in White House trade adviser Peter Navarro’s statement regarding the proposed tariffs, 
“We have seen this lesson time and again during this administration with the steel and aluminum tariffs, with the threat of auto tariffs, and with the China tariffs.”
“Tariffs mean more American jobs and factories.”
They do not. 
Tariffs mean Americans will pay more for everything, as automakers cried foul paying higher prices for steel and aluminium. 
Part of the reason why the relentless money-printing by the U.S. Federal Reserve and the issuance of bonds by the U.S. Treasury Department over the past decade have not resulted in unsustainable inflation has been the resilience of highly optimized global supply chains. 
Exporters such as China can’t afford for the dollar to tumble, because its factories take in dollars to pay for upstream and raw material suppliers from overseas, so Beijing buys U.S. Treasuries to keep America’s funding costs low and Americans get to enjoy Chinese goods cheap. 
But that could change in a heartbeat if American firms were to relocate more production onshore. 
With increased production costs (through higher expenses), those costs will ultimately need to be passed on. Trump is building a trade wall, and Americans (not Mexico) will pay for it. 
Trump’s China tariffs have already clearly demonstrated that the one who tariffs hurt the most is the American consumer. 
And with the coronavirus forcing the hand on unprecedented fiscal and monetary policy measures, introducing tariffs to force American companies to come home may be just the trigger needed to spark off inflation. 

3. While Beijing Was Banning Bitcoin, Chinese Were Transferring Tether

  • Record US$50 billion spirited out of China in the past year using cryptocurrencies with dollar-based stablecoin Tether accounting for almost 40% of that amount
  • Tether’s long term demand robust despite controversy 
Every morning Ding Ru, who hardly speaks a word of English, walks out to the porch of his US$10 million mansion in Sunnyvale, California, to raise the star-spangled banner and salute the flag. 
“Freedom,” Ding says, in a smattering of heavily accented English, “is never free,” as he makes a sweeping gesture over his expanse of terra firma, paid for in cryptocurrency. 
But no, Ding hasn’t spirited away millions of dollars in Bitcoin to the United States, instead, and much to Beijing’s chagrin, Ding has used the digital “equivalent” of the dollar, the dollar-backed stablecoin Tether. 
According to new research by blockchain forensics firm Chainalysis, a whopping US$50 billion in cryptocurrency has left China in the past year alone, the pace of which has accelerated during China’s harsh anti-democracy crackdown in Hong Kong. 
And Tether, the dollar-backed stablecoin whose value is pegged to the U.S. dollar is estimated to have accounted for over US$18 billion of that flow. 
According to Chainalysis,
“Stablecoins like Tether are particularly useful for capital flight, as their USD-pegged valued means users selling off large amounts in exchange for their fiat currency of choice can rest assured that it’s unlikely to lose its value as they seek a buyer.”
With Chinese citizens limited to moving the equivalent of only US$50,000 a year out of the country, wealthy Chinese have long circumvented Beijing’s capital controls by making overseas real estate investments or creating offshore shell companies, until cryptocurrencies came along. 
While Bitcoin was heavily used in the early days to carry Chinese wealth beyond the Great Wall, Tether has emerged as a dollar replacement for many Chinese, both to facilitate capital flight, and as a payment means, with lots of Chinese businesses and merchants, especially those working overseas, eagerly accepting Tether. 
And while Tether is under siege by a New York state attorney lawsuit, alleging losses of US$850 million at Tether and its related cryptocurrency exchange Bitfinex, a subpoena by the U.S. Commodity Futures Trading Commission back in 2017, alleging that Tether had falsely claimed each coin was backed by one U.S. dollar, ultimately saw no decision issued in that regard. 
Meanwhile, Tether use has exploded, with the amount of outstanding Tether skyrocketing to US$12.8 billion from about US$2 billion last year. 
And Tether demand is set to continue growing. 
With Chinese President Xi Jinping instituting another round of internal purges to consolidate his power under the guise of rooting out corruption, skittish party apparatchiks as well as their corporate collaborators will be looking to move even more money out of China, and what better way then Tether? 
Some things in life money can’t buy, for everything else there’s Tether. 

Novum Digital Asset Alpha is a digital asset quantitative trading firm.

Exclusive access to Novum Digital Asset Alpha’s Daily Analysis is made in conjunction with Bitcoin Malaysia.

The information and thoughts laid out in this analysis are strictly for information purposes only and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws.

It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.

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