Novum Alpha – Daily Analysis 25 November 2020 (8-Minute Read)

Wishing you a wonderful Wednesday as we roll into the midweek! 

In brief (TL:DR)

  • U.S. stocks closer higher on Tuesday with the S&P 500 (+1.62%), tech-heavy Nasdaq Composite (+1.31%) and blue-chip Dow Jones Industrial Average (+1.54%) all up on optimism of a smooth transition of power in Washington 
  • Asian stocks were higher in the morning trading session on relief that Trump has allowed his staff to commence the actions necessary to allow an incoming Biden administration 
  • U.S. 10-year Treasury yields remained more or less unchanged at 0.880% as investors pushed stocks to all-time-highs (bond yields typically rise when Treasury prices fall).  
  • The dollar extended its decline, with investors betting on stocks and other assets. 
  • Oil dipped slightly with January 2021 contracts for WTI Crude Oil (Nymex) (-0.16%) at US$44.84 from US$44.91 as Chinese demand for oil has shown a resurgence.  
  • Gold was more or less flat as February 2021 contracts for Gold (Comex) (+0.19%) rose slightly to US$1,814.40 from US$1,810.90.  
  • Bitcoin (+4.51%) rose to US$19,120 as inflows into exchanges continued to lead outflows (inflows typically suggest that investors are looking to sell Bitcoin in anticipation of price falls). 

In today’s issue…

  1. Who’s Janet Yellen and Why Should You Care? 
  2. Gold is Less Shiny in Good Times
  3. Bitcoin’s Blowout Birthday?

Market Overview

Trump didn’t lose the 2020 U.S. Presidential Elections, he was just having an “alternate win.” 
And with so much “alternate winning” that Americans have grown tired of “alternate winning,” Trump has finally acquiesced to his General Services Administration to co-operate with the incoming Biden administration’s staff, releasing funding and providing access to sensitive U.S. state secrets. 
But Trump hasn’t conceded the election just yet, defiantly claiming that he will “prevail,” whatever that means. 
In Asia, stock markets rejoiced at the dying and painful to watch closing scenes on the reality drama that has been the Trump presidency with Tokyo’s Nikkei 225 (+1.94%), Sydney’s ASX 200 (+0.87%), Seoul’s KOSPI (+0.60%) and Hong Kong’s Hang Seng Index (+0.39%) all up in the morning trading session. 

1. Who’s Janet Yellen and Why Should You Care?

  • The next U.S. Treasury Secretary could be bullish on spending, especially given her track record at the U.S. Federal Reserve  
  • More robust fiscal policy from the Biden administration could put pressure on the dollar and see even further asset inflation 
If approved by the Senate, Janet Yellen will become U.S. Treasury Secretary to the 46th President of the United States, confronting an economic recovery that appears to be losing steam and uncertain prospects for additional stimulus from Congress.
Yellen is no stranger to the lofty heights of sovereign finance, having served as the Chair of the U.S. Federal Reserve straddling the tail end of the Obama administration as well as the beginnings of the Trump administration, Yellen has only been away from Washington for two years.
As someone who is potentially even more dovish than current Fed Chairman Jerome Powell, Yellen has long held that pulling back on spending too abruptly could lead to a slow recovery, like the one that followed the last financial crisis.
Yellen also believes that as long as interest rates and inflation are low, there is limited downside to borrowing more to help return the economy to its pre-pandemic health.
Her appointment could see markets rise as she attempts to push through more substantive stimulus packages through Congress.
Yellen is not the sort to shy away from big numbers, especially if they are viewed to be beneficial to the U.S. economy.
One of Yellen’s first decisions if appointed would be whether or not to revive several emergency lending facilities the Treasury established this year with the Fed, to help backstop credit markets, and which her predecessor Steven Mnuchin is looking to let lapse by the end of this year.
Yellen’s appointment would provide markets with a welcome respite.
With short term interest rates close to zero, the Fed is hamstrung in its ability to respond to sudden economic shocks and instead would now be in a better position to coordinate with the Treasury, especially given that both Yellen and Powell served together at the Fed for a period of time.
More importantly, Yellen is likely to engage with the world’s second largest economy, China, as opposed to antagonize it, with potentially greater room for internationally coordinated responses to global economic challenges, including fresh support for emerging markets and avoiding protectionism.  
If the Trump administration saw the United States turn its back on the world, the Biden administration will demonstrate that America is back, and Yellen’s appointment will add to that narrative. 

2. Gold is Less Shiny in Good Times

  • Gold has seen an interim pullback as investors head out into risk assets 
  • Some analysts are suggesting that gold should appreciate again as inflation picks up in the coming years, while others suggest that there is no clear correlation between inflation and demand for gold 
With not one but now three potentially effective coronavirus vaccine candidates in the mix, investors are betting that the worst may be behind us.
Despite a worsening pandemic situation in the United States and much of Europe, news that three coronavirus vaccine candidates with efficacies in excess of 90% are fueling bullish sentiment and seeing investors dump gold once again for other riskier assets.
To be sure, gold was never a “safe haven” asset per se, with little data to back up its perceived value as a hedge against risk assets such as stocks.
This year, gold, tech stocks and Bitcoin almost moved in lockstep as the pandemic was raging throughout much of the world, challenging the conventional wisdom that there are few safe havens in troubled times.
But now that the end of the pandemic may soon be in sight, gold has fallen over 10% since its August highs that could mark a midterm slide in the precious metal.
A recovering economy dents the appeal of gold because it generates no yield, especially as investors move out of Treasuries and into riskier assets such as stocks, pushing yields higher.
Nonetheless, some analysts are predicting that if and when inflation starts up again, gold will glitter once more, with Goldman Sachs (+3.74%) suggesting that gold could hit US$2,300 in the next 12 months as the dollar comes under greater pressure.
A Biden administration which isn’t hesitant to nurse greater sovereign debt may also want to keep spending less restrained, putting further pressure on the dollar as well.
Regardless, some investors are moving into other precious metals more closely associated with industrial demand and that are expected to rise in a post-pandemic economic recovery, including silver, platinum and palladium.
Goldman Sachs is of the view that the risk of inflation is “greater than at any other time since the 1970s,” primarily due to green spending plans in China, Europe and the United States.
And Goldman Sachs is hardly alone in their prediction for a resurgence in gold, with Citigroup (+7.03%) suggesting that gold will hit fresh highs in 2021 as central bank buying keeps yields on other assets suppressed.
The main problem with both these views is that it assumes a clear and unbroken correlation between inflation and gold.
When the U.S. abandoned the gold standard in 1972, predicted inflation failed to materialize.
Following the 2008 financial crisis, government spending was pipped to set off inflation, which also didn’t happen.
Part of the reason for that of course was globalization, where developing countries were able to supply manufactured goods cheaply to the rich world.
But with rising standards of living, particularly in the world’s factory China, that may be set to change.
Yet whether or not gold is a useful hedge for inflation is still unclear, because ultimately, investors may prefer to roll the dice on stocks instead. 

3. Bitcoin’s Blowout Birthday?

  • Bitcoin closes in on US$20,000 and surpassing its all-time-high as it heads closer to its 12th birthday 
  • Looking back, Bitcoin has been unable to reconcile two competing goals, as a spendable currency to replace fiat, while being deflationary as a store of value – it has since reverted to the latter 
Bitcoin will be 12 years young this January, when Satoshi Nakamoto, the enigmatic creator of Bitcoin mined Bitcoin’s genesis block, and the rest as they say, is history.
With Bitcoin now closing in on its 2017 all-time-high of US$20,000 some are asking whether the world’s first cryptocurrency has lived up to its promise, or is it simply just another tool for speculation in markets already crowded with assets for betting on.
Because Nakamoto had envisioned Bitcoin to serve two fundamentally opposing functions, it was always going to be challenging to achieve the Bitcoin whitepaper’s purported promise.
It’s difficult for any asset to be both a spendable currency and a store of value.
Fiat currency was deliberately designed to be inflationary – so people who don’t spend their money are actually “losing” money, as the value of the goods and services that they can buy diminishes over time.
That puts more weight on consumption and helps to keep the economy driving along.
Bitcoin on the other hand is deflationary, its emission schedule or the amount that is being mined halves every four years and is algorithmically and programmatically limited to 21 million Bitcoin.
That means that Bitcoin by design is intended to appreciate in value which acts as a disincentive to people who want to spend it.
Add to that, the decentralized nature of the Bitcoin blockchain means that confirming transactions will never make it as fast or as low cost (especially for smaller transactions) than legacy payment services.
And because the Bitcoin blockchain is immutable, “oopsies” are irreversible and the finality of transactions anathema to the intrinsically fallible nature of humans who are prone to making mistakes.
But perhaps where Bitcoin may truly shine is in its ability to represent the last bastion of ideological freedom.
The pandemic has fundamentally challenged long-held assumptions with regards to freedom and civil liberties.
Government responses, including forced lockdowns, have conjured up nightmares of a world slipping into authoritarianism, where civil liberties cannot be taken for granted.
Contact tracing is also increasing the level of government encroachment into individual privacy and there are still significant numbers who believe that the coronavirus is a cover for governments meddling deeper into the affairs of its citizens.
Against that backdrop, Bitcoin’s anonymity acts as a hedge against the worst excesses of a dystopian future, an insurance policy should the world head on an authoritarian bent.
That Biden will be inaugurated in January may lull many into a false sense of relief that authoritarianism and populism have been put down.
But that would be an oversimplification of the world we live in, with over 70 million Americans still voting for Trump and previously welcoming global cities now turning their backs on skilled expatriates.
China in its latest plenary session has also expressed a stronger desire to return to its days of splendid isolation akin to the Ming and the Qing dynasties, where China was self-sufficient in culture, commerce, arts, language and wealth.
To be sure, Bitcoin is an expensive and energy-intensive solution, but in the event that the world takes on an apocalyptic turn, it’s reassuring that Satoshi Nakamoto at least created Bitcoin just in case. 
For that reason alone, maybe US$20,000 is more of an inspirational price, rather than an aspirational one. 

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

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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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