Novum Alpha – Daily Analysis 5 January 2021 (10-Minute Read)

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

In brief (TL:DR)

  • U.S. stocks fell sharply as traders shuffled into their offices on Monday, on concerns over a worsening pandemic with the S&P 500 (-1.48%), blue-chip Dow Jones Industrial Average (-1.25%) and tech-centric Nasdaq Composite (-1.47%) all down. 
  • Asian stocks took their cue from Wall Street and were a mixed bag in choppy trading in the pre-lunch trading session. 
  • U.S. 10-year Treasury were higher as yields fell to 0.927% from 0.947% as investors dumped risk assets in favor of safety (yields fall when bond prices rise). 
  • The dollar slipped as investors braced for a likely Democrat sweep of Congress in the Georgia senatorial run-off election. 
  • Oil slipped with February 2021 contracts for WTI Crude Oil (Nymex) (-2.59%) at US$47.75 from US$49.02 with OPEC+ delaying discussions over supply side management to February and on worsening pandemic conditions 
  • Gold rose on increased caution with February 2021 contracts for Gold (Comex) (-0.02%) rising to US$1,946.20 from US$1,924.30. 
  • Bitcoin (-1.94%) recovered to US$32,440 after falling to as low as US$27,700 at one point before pulling back as inflows into exchanges leaped ahead of outflows and more sophisticated investors riding out retail in the dump and pump (inflows typically suggest that investors are selling Bitcoin in anticipation of further price decreases). 

In today’s issue…

  1. What Happens to an Economy after a Pandemic? 
  2. The Pandemic Will Get a Whole Lot Worse Before It Gets Better 
  3. Bitcoin’s Volatility Serves as a Reminder to All Investors of Its True Nature

Market Overview

Oh wait, the pandemic is still a thing? 
Even as investors priced in a speedy recovery for 2021 as coronavirus vaccines are administered across the globe, actual conditions on the ground are suggesting that a reset of recovery timetables may be in order. 
As the pandemic continues to surge across much of Europe and North America, the winter temperatures are helping to perpetuate the spread of a coronavirus mutation that is far more virulent than its predecessor and putting pressure on authorities to renew economically damaging lockdowns. 
Asian markets were mostly lower with only Tokyo’s Nikkei 225 (+0.01%) up marginally, while Sydney’s ASX 200 (-0.33%), Hong Kong’s Hang Seng Index (-0.17%) and Seoul’s KOSPI (-0.17%) were all down. 

1. What Happens to an Economy after a Pandemic?

  • A shift towards higher levels of welfare, higher taxes and a redistribution of wealth could become the durable outcome of the coronavirus pandemic 
  • Demand for labor in areas such as manufacturing could likely be on the decline in rich countries, with a consequent rise in automation and affordable goods and services on populations relying on government handouts 
In many ways, the coronavirus pandemic bears strong parallels to the Black Death in Europe in the mid-14th century, the deadliest pandemic recorded in human history.
Occurring at a time of great economic activity and advances in science, transport and technology as Europe was just entering the Renaissance period, the Black Death swept across much of Europe and Eurasia killing an estimated 200 million.
At the time, feudal lords held sway over capital, but in the aftermath of the Black Death, a shortage of labor saw real wages surge, transferring vast amounts of power to workers and ushering in the European Renaissance which saw a massive creation of wealth.
Fast forward to our current epoch and decades of depressed real wages through globalization and automation have meant that the comptrollers of capital, like the feudal lords before them, hold far more power and wealth than the average worker – is that likely to shift in the aftermath of the coronavirus pandemic?
With stimulus checks and fiscal aid, governments in many capitalist societies have essentially, albeit temporarily, shifted to a form of universal basic income.
And while that universal basic income will not necessarily translate to a durable trend, it will be politically challenging to withdraw such support once instituted, especially when voters can express their demand for such measures at the ballot box.
Labor trends such as offshoring the most labor-intensive industries to cheaper jurisdictions, as well as automation, are unlikely to change and that means workers in the rich world can no longer rely on once abundant manufacturing or even service jobs.
And that means more state intervention and more government debt to support the larger base of workers who will now find themselves structurally unemployed.
For investors, that increase in government spending should bode well for asset inflation and line the pockets of retailers such as Walmart (+1.65%) which cater to the more cost-sensitive, as well as companies that focus on workplace automation such as ABB (+1.50%), a Swiss-Swedish multinational company that provides automation solutions to a wide variety of industries.
Many of the pre-pandemic jobs that once existed may be gone forever and some of the shifts in work habits as well as business practices may prove to be durable.
Even key industries may see demand for their services downsized, including business-focused travel and prime office space, which may also witness revenues whittled down.
To maintain the social compact, a center-left government in Washington may pave the way for a rethink about social programs and potentially usher in a new form of wealth transfer, not in the way of organized labor, but through higher taxes, both on capital and income and broader welfare programs.

2. The Pandemic Will Get a Whole Lot Worse Before It Gets Better

  • Rise of mutated coronavirus that is far more virulent will put pressure on countries to enforce border lockdowns 
  • Firms which had priced in a recovery this year with a resumption of normalcy in the second half of 2021 may be faced with liquidity issues and be forced to raise fresh capital in the light of soaring infection rates 
This year ought to be a year of recovery – with not one, but several coronavirus vaccines already being administered, the global economy ought reasonably be on a mend, with people being able to travel internationally again and go to work and school.
Not quite.
Because the early arrival of effective vaccines for the coronavirus have been a double-edged sword, lulling the world into a sense of complacency largely driven by pandemic fatigue. 
In the United Kingdom, the number of people testing positive for the coronavirus now routinely exceeds 50,000 daily, while in the U.S. that figure is regularly in excess of 200,000.
Given that the U.K. has a population slightly less than a fifth of the U.S., the numbers are alarming to say the least and especially since the country is a lot smaller than its Atlantic cousin.
The already embattled National Healthcare System in the U.K. which provides universal healthcare, is on the brink of collapse and a new coronavirus mutation, first discovered in the country, has already made landfall in many other parts of the world.
Meanwhile in the U.K., healthcare staff, the same key workers instrumental in administering any coronavirus vaccines, are exhausted, with many either isolating or sick.
So bad is the situation in the U.K. that the country has imposed a nationwide lockdown, with measures far more stringent than in March or April.
Given that the new coronavirus strain is far more virulent, as the new variant lands on other shores, the pandemic recovery timetable may need to be postponed.
More transmissions inevitably means more deaths, and countries will unavoidably have to renew lockdowns and bear the economic consequences of those lockdowns just as people are starting to emerge out of the cocoons of their homes.
Economically, that means companies which had been relying on life support, including airlines, cruise operators and other firms most badly hit by the pandemic, will need to raise more credit from markets already leery over the vast amounts of their borrowings.
Fortunately, with interest rates continuing to be so low and likely to remain low for the foreseeable future, there ought to be bidders at every price level.
But a fresh wave of outbreaks could see a return of the investment themes that played out well in 2020, including a return to tech stocks and delay the value stock rotation that marked the final quarter of 2020. 

3. Bitcoin’s Volatility Serves as a Reminder to All Investors of Its True Nature

  • Bitcoin falls as much as 17% in a single day, touching a low of US$27,700 before recovering sharply to trade around US$32,000 
  • Influx of retail investors at the start of the new year should see even greater volatility, making the timing of highs and lows that much more challenging 
“And you’ve bitten me, but why? You know your bite is poisonous and now I’m going to die”
“Oh shut up, silly woman,” said the reptile with a grin,
“You knew damn well I was a snake before you took me in.”
– Oscar Brown Jr., The Snake
So, you heard about Bitcoin in 2017, declared it a scam and moved on with life.
You heard about Bitcoin again in 2019, but decided that US$20,000 for a bit of digital currency was too expensive and it was a scam and you moved on with life.
Come 2021 and you were convinced that Bitcoin was the future and you bought it at US$34,000, only to see your investment crash to US$27,700, where you panicked, sold it at a tremendous loss and were more convinced than ever that Bitcoin was a scam and you moved on with life.
Just that Bitcoin recovered to US$32,000 as soon as you moved on with life.
For many cryptocurrency investors, particularly the retail crowd, this story may be painfully familiar.
Because just when institutional investors poured into Bitcoin in 2019, retail followed suit this year, only to realize that when you swim with the big boys, the currents are changeable.
So Bitcoin was heftily flushed by algorithmic profit-takers yesterday, with a single-day drop of as much as 17% at one point, reminding everyone of the nature of the beast that they were dealing with.
Yet in the broader context of Bitcoin, the losses are miniscule, compared with the rally of 50% in December alone.
After a parabolic 2020, Bitcoin started the new year with a bang, heading out of the gates at US$34,000 and hitting all time highs on the eve of a new work year. 
If nothing else, the healthy correction on Monday, coincidentally just as traders returned to their desks, is a reminder that Bitcoin is still a nascent asset class, extremely volatile and prone to speculation and narrative.
As with all things Bitcoin-related, it’s hard to put a finger on the exact cause of Monday’s market rout, or the almost knee-jerk recovery thereafter, but investors should gird their loins to know that such bouts of sharp volatility can and will happen time and time again.
Regardless, Bitcoin is still up over 300% over the past year and remains one of the best investments during a pandemic year.
Fueled by speculation that cryptocurrencies are going mainstream, with a growing number of high-profile institutional investors allocating resources to Bitcoin, the digital asset saw explosive growth, particularly in the final quarter of 2020.
Yet as the number of retail investors into Bitcoin grows, volatility, already high, can be expected to rise further.
In a year that has seen retail-focused zero fee trading platforms like Robinhood emerge as a powerful driver of stock markets, small traders could quite easily move out of equities and into cryptocurrencies bringing their manic sense of the markets with them. 

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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