Novum Alpha – Daily Analysis 15 December 2020 (10-Minute Read)

Top of the Tuesday to you and I hope you’re having a terrific one! 

In brief (TL:DR)

  • U.S. stocks started the week a mixed bag with the S&P 500 (-0.44%) and the blue-chip Dow Jones Industrial Average (-0.62%) down slightly, while the tech-centric Nasdaq Composite (+0.50%) was up marginally.  
  • Stimulus is still in play with a US$908 billion pandemic package with bipartisan support coming out of Congress but it’s unclear if Trump will use his veto to kill it. 
  • Asian stocks slipped in the morning trading session as investors weighed up renewed pandemic lockdowns in much of the western hemisphere. 
  • U.S. 10-year Treasury yields were little changed at 0.896% from 0.910% but look set to rise further on the back of stimulus and increased risk appetite (yields fall when bond prices rise). 
  • The dollar steadied as investors rotated back into safe haven assets on diminishing risk appetite. 
  • Oil fell slightly with January 2021 contracts for WTI Crude Oil (Nymex) (-0.19%) at US$46.90 from US$46.99, but was otherwise unchanged. 
  • February 2021 contracts for Gold (Comex) (-0.13%) fell slightly to US$1,829.80 from US$1,832.10 with gold expected to see further weakness this week on the back of a rising dollar. 
  • Bitcoin (+1.64%) reversed losses to rise to US$19,331 from US$19,019 as flows into exchanges slowed (inflows typically suggest that investors are looking to sell Bitcoin in anticipation of price falls). 

In today’s issue…

  1. Google Outage Highlights How Integral Tech is to Modern Life
  2. Inflation? What’s That?
  3. Bitcoin For the Masses

Market Overview

Markets are finicky, they sometimes price in the future and other times the present, swinging from irrational exuberance to unwarranted pessimism and often at the same time. 
 
With fresh restrictions in the face of worsening pandemic conditions in much of Europe and the U.S., investors are growing increasingly concerned that without additional government support, lockdowns will create more economic hardship even as coronavirus vaccines are rolling out. 
 
In Asia, markets entered Tuesday lackluster with Tokyo’s Nikkei 225 (-0.12%), Sydney’s ASX 200 (-0.09%), Hong Kong’s Hang Seng Index (-0.44%) and Seoul’s KOSPI (-0.15%) all down slightly. 
 

1. Google Outage Highlights How Integral Tech is to Modern Life

  • Google (-1.22%) outage highlights just how integrated and reliant the world has become on a handful of tech companies  
  • Concentration risks inviting regulatory and antitrust scrutiny, especially when large swathes of the economy gum up from the outage of any service provider 
At the start of business on Monday morning in the United States, the number one search term on Google was “Is Google down?”
 
The only problem? Google couldn’t return any search results because Google itsel was down.
 
Flipping over to YouTube, that same search query returned the same frustration as a swathe of Google’s internet services suffered a massive outage.
 
Internet users suddenly found themselves having to run searches on Microsoft’s (+0.44%) Bing, and Yahoo and if you’re unfamiliar with either, you can Google them (service has returned).
 
The same way that the second most favorite drink in the U.S. after Coke (-0.09%) isn’t Pepsi (-0.51%), it’s Diet Coke, the second most popular search engine on the internet after Google isn’t Bing, it’s YouTube.
 
But on Monday morning over a dozen Google services, including email, storage, videoconferencing and spreadsheets all went offline at 6.55 am Eastern Time but were up before the U.S. east coast began its workday at 7.35 am.
 
In total, over 10 million Google users from schools to businesses were affected by the outage.
 
According to a tweet from Google Cloud, the outage was the result of an “internal storage quota issue” – the internet ran out of hard disk space?
 
Temporary interruptions to popular online services are relatively common and despite the immense pressure put on systems as the coronavirus pandemic forced people into lockdown, have held up relatively well for the most part.
 
In November, Amazon (+1.30%) grappled with an outage of several hours tied to its enormous cloud computing operation affecting key clients including video streaming device company Roku (-1.98%).
 
Earlier in July, apps such as music streaming service Spotify (-5.99%) and dating app Tinder experienced outages for several hours because of what Facebook (+0.23%) said was a bug in its software for iPhone users.
 
Outages aside, it’s unlikely that users are going to abandon their favorite apps and workspaces, and if nothing else, encourage them to purchase redundancy from other cloud service or software providers. 
 
But every outage, especially crippling ones, focus the attention on just how pervasive these services are and provides more fodder for regulatory and antitrust action. 
 
 

2. Inflation? What’s That?

  • Some inflation risks are starting to brew, especially as supply fails to keep pace with demand as coronavirus vaccines eventually become widely available 
  • Improved productivity and increased automation may dampen inflationary risks, while low interest rates may buoy a variety of assets not previously considered 
Half a century ago, in the 1970s, inflation in the rich world averaged 10% a year, with sudden spikes caused by oil price shocks, geopolitical tensions and soaring production costs.
 
But since then, China has become the world’s factory for cheaply made goods, automation has kept production costs lower, and oil has become increasingly less significant as the rich world embraced alternative energy sources and public transport.
 
Inflation has come to be taken for granted and in the 2010s, the annual rate stayed stubbornly below 2%, much to the disappointment of central bankers.
 
But there are some concerns that once people are vaccinated and freed from the tyranny of video communications, exuberant consumers may go on a spending spree that outpaces production capabilities, causing prices to rise.
 
To be sure, there are already some signs of production bottlenecks and the coronavirus pandemic has brought into sharp focus just how optimized supply chains are.
 
The price of copper has soared some 25% since the start of this year and a surge in imports is causing havoc at the world’s ports at a time when the oil market has made a faltering comeback.
 
But betting on inflation, particularly given recent history, is a fraught business.
 
There are some signs that the pandemic, far from ushering in inflation, might give way to an era of rapid productivity growth, further dampening inflationary pressures.
 
Companies have found ways to leverage technology and workers could possibly spend less time in fruitless commutes, increasing productivity.
 
And those firms which have sought to downsize their labor forces may soon realize that those job cuts were not temporary, as a smaller workforce is proving just as able to cope.
 
The biggest threat in the post pandemic era will be to unions, which were a major contributor to inflation in the 1970s.
 
Low inflation however means low interest rates, which have contributed to a record-breaking year for capital-raising around the world.
 
Blockbuster IPOs have been all the vogue and at times it has seemed investors will bankroll just about anyone, with capital markets cheering even louder if Congress can pass a fresh stimulus package.
 
Prolonged low rates mean that traditional metrics for judging investments will need to be abandoned, with even music royalties making for an interesting portfolio addition, as evidenced by Bob Dylan who recently sold the rights to his music.
 
And while many investors may have initially purchased Bitcoin as an inflation hedge, it could well be its more speculative qualities that fuels its rise. 
 
 

3. Bitcoin For the Masses

  • Insurances companies are starting to buy Bitcoin and even if a small proportion of these institutional investors should get into Bitcoin, could result in outsize moves in the cryptocurrency’s price 
  • Pension funds and insurance funds are currently limited by regulations and risk management as to their overall appetite for Bitcoin, but that could catch up 
It’s finally happened, that moment that so many Bitcoin maximalists have been waiting for – institutional adoption.
 
According to once Bitcoin skeptic JPMorgan Chase (-1.06%), a recent investment in Bitcoin by Massachusetts Mutual Life Insurance highlights the potential for additional institutional demand for cryptocurrency in the coming years.
 
In a note last Friday, JPMorgan Chase strategist Nikolaos Panigirtzoglou said that the US$100 million purchase of Bitcoin by Massachusetts Mutual Life Insurance shows that interest in cryptocurrencies has now spilled beyond family offices and wealthy individuals to include insurance firms and pension funds as well.
 
And while Panigirtzoglou suggests that insurance funds and pensions are unlikely to ever make large investments into cryptocurrency, even a small shift towards the cryptocurrency could be significant,
 
“MassMutual’s Bitcoin purchases represent another milestone in the Bitcoin adoption by institutional investors.”
 
“One can see the potential demand that could arise over the coming years as other insurance companies and pension funds follow MassMutual’s example.”
 
When it comes to institutional investors, they seldom want to be the first one in the pool, but they also don’t want to be left out altogether and a move by one institutional investor into Bitcoin could easily embolden others to take the plunge as well.
 
Bitcoin continues to be in sight of the psychologically significant US$20,000 level of resistance, a level which it has yet to breach and proponents argue that the cryptocurrency is gaining more recognition as a portfolio diversifier amid medium term dollar weakness.
 
According to JPMorgan Chase strategists, if pension funds and insurance firms in the U.S., Eurozone, United Kingdom and Japan were to allocate just 1% of their assets to Bitcoin, that would translate into an additional US$600 billion demand for Bitcoin.
 
To put that institutional demand in perspective, the current market cap for Bitcoin is just US$357 billion.
 
But the JPMorgan Chase strategists cautioned against relying too much on traditional investors like insurers and pension funds to boost Bitcoin price as regulatory hurdles relating to liability mismatches and risk levels limits how much they can put into Bitcoin.
 
Nonetheless, Bitcoin investors are certainly welcoming the entry of these institutional investors into the space, boosting Bitcoin past US$19,000. 

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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