Thankful it's Thursday and I'm trusting yours is turning out to be terrific!
In brief (TL:DR)
- U.S. stocks reverted to familiar themes midweek with the S&P 500 (+0.77%), tech-heavy Nasdaq Composite (+2.01%) up on the back of tech stocks, while the blue-chip Dow Jones Industrial Average (-0.08%) which is constituted by more traditional sectors of the economy was down slightly.
- Asian stocks were mostly down in the morning trading session as the initial euphoria of a coronavirus vaccine faded.
- The yield on U.S. 10-year Treasuries fell two basis points to about 0.950% (yields typically fall when Treasury prices rise) but remains at its highest level in weeks on expectations that Democrats will increase government spending come 2021.
- The dollar held onto gains made as investors returned into familiar themes of safety in tech stocks and the greenback.
- Oil was mostly flat with December contracts for WTI Crude Oil (Nymex) (+0.07%) at US$41.48 from US$41.45 in the previous session.
- Gold inched up as December contracts for Gold (Comex) (+0.11%) pushed higher to US$1,863.60 from US$1,861.60 in the previous session.
- Bitcoin (+0.92%) rose to US$15,623 as outflows from exchanges slowed (outflows typically suggest that investors are looking to hold Bitcoin in anticipation of price increases) and as investor sentiment turned cautious overnight, on realization that a coronavirus vaccine could still take years to roll out and administer.
In today's issue...
- Why Won't Trump Concede?
- A Contrarian Bet in a Time of Coronavirus
- DeFi-nitely Over?
Market Overview
Reality bites.
With investors now starting to recognize that the development of a potential coronavirus vaccine is merely the beginning of the end, it's certainly not the end, especially when it's come to the pandemic which has wrought economic destruction across the globe.
And so traditional pandemic investment themes were resurrected, with flows into tech stocks, the dollar, gold and Bitcoin as the reality that the pandemic drama could play out for several more years starts to seep in.
Asian stocks were understandably down in the morning trading session with Tokyo's Nikkei 225 (+0.82%), the only index in the green while Seoul’s KOSPI (-0.17%), Sydney’s ASX 200 (-0.12%) and Hong Kong's Hang Seng Index (-0.28%) were all down slightly, as money flows moved out of Asia and other emerging markets.
1. Why Won't Trump Concede?
- Follow the money to realize that Trump's refusal to concede the U.S. presidential elections is more about making paper than politics
- Trump campaign solicitation for funds to fuel alleged investigations and legal challenges into the electoral process may be nothing more than a veiled attempt at a last ditch cash grab before Trump leaves the White House
The Associated Press (AP) has been the most trusted source of U.S. election information, with a history of accuracy dating to 1848.
So over the past weekend, when the AP called the U.S. Presidential Election for Democrat Joseph R. Biden Junior, spontaneous celebrations erupted in cities across the United States and this week, major world leaders offered their congratulations to Biden and his running mate Kamala Harris.
If the heads of government in other countries had doubts as to the outcome of U.S. elections, those were not apparent, with even longtime Trump allies like Mohamed bin Salman of Saudi Arabia and Recep Erdogan of Turkey offering their congratulations to Biden.
So why won’t Trump concede?
While it’s perfectly within Trump’s legal right to have any allegations of electoral fraud investigated, that’s probably not what he’s after – it’s money.
There’s a mountain of debt, to the tune of almost US$1 billion, against Trump, that is coming due in 2021.
And then there’s the Trump campaign’s debt which has yet to be paid down.
By refusing to concede, Trump is appealing to the 71 million Americans who voted for him to vote for him once more, using their wallets.
In solicitations from the “Make America Great Again Committee,” that is being used to investigate alleged electoral fraud, none of the money actually goes to investigating the fraud, instead 40% goes to the Republican National Committee, with the remainder 60% being used to pay down Trump campaign debts.
Then there’s the “Save America PAC” which Trump recently registered, which again, is ostensibly soliciting funds to mount legal challenges in swing states, but is really just another way to rake in cash in quantities not limited by laws about election contributions.
Trump needs money, and fast.
It’s estimated that in his four years in office, Trump’s fortune fell by US$1 billion as profits at his golf clubs and other properties suffered with customers distancing themselves from the Trump brand because of his rhetoric from the White House.
And even though Trump and his cronies are crowing on about electoral fraud, it’s really just a cash grab, raising money for these investigations and legal challenges is really just about paying his family, friends and himself.
2. A Contrarian Bet in a Time of Coronavirus
- Legendary short seller Bill Ackman is taking out hedges again that corporate debt markets will tank
- Ackman's Pershing Square made the bulk of its returns this year, some US$2.6 billion, by taking out hedges that anticipated the market would fall in March
It takes a steely composition to stand up, and go against the flow, but billionaire hedge fund manager Bill Ackman is no stranger to having his views challenged.
Ackman’s failed attempt to short multilevel marketing firm Herbalife (+4.21%), arguing that its business model and practices were essentially unsustainable, saw his firm Pershing Square lose US$1 billion over five years.
And now Ackman is back to bet against what he sees as complacency over the coronavirus pandemic.
To be sure, 2020 has been a great year for Ackman.
In late February, Ackman made a series of trades designed to hedge Pershing Square’s portfolio, in the event of a market sell-off, and within a month, the trade reaped some US$2.6 billion in profits, as markets tanked in March.
Now Ackman is hedging his equity exposure with insurance against what he believes is an impending wave of corporate bond defaults.
Speaking with the Financial Times, Ackman said that his latest hedge is about 30% the size of the bet he placed in late February, where policies that cost US$27 million in premiums, saw profits of some US$2.6 billion.
But Ackman is hoping that he’ll be wrong this time and the hedges are merely a precaution should things go bad for the global economy, predicting that the next few months would be a challenging time.
With the prospect of a coronavirus vaccine now almost within reach, Ackman is concerned that people could become complacent about wearing masks and less likely to view the virus as a threat.
There are other reasons as well to consider taking out hedges the way Ackman has as well.
While a Biden presidency should encourage a new round of stimulus, the likelihood that the Republicans will retain the Senate mean that any package is likely to fall far short of the massive stimulus which Democrats would have hoped for.
Biden and the Democrats will also be looking to roll back Trump’s 2017 tax cuts as well as increase taxes on companies and the rich, and while challenging to pass through the Senate, will still be capable of shaking up markets.
Compound that with the U.S. Federal Reserve not making any fresh commitments to soak up corporate debt, especially as unemployment numbers are starting to improve, and there just may be the ingredients for a perfect corporate debt storm on the horizon.
3. DeFi-nitely Over?
- Although Bitcoin has risen some 50% since September, tokens centered around decentralized finance have fallen by as much as 40%
- Deflation of the bubble surrounding decentralized finance tokens has not affected value locked in DeFi smart contracts, where value locked in various smart contracts continues to break new records
Bitcoin’s long winter may finally be over, but for a collection of tokens centered around decentralized finance or DeFi, it may be just the beginning.
While Bitcoin has climbed some 50% since early September, the assortment of tokens centered around DeFi have since tumbled after posting triple-digit returns just months earlier.
DeFi apps, which allow investors to lend, trade and borrow from one another, without requiring any traditional know-your-customer or anti-money laundering procedures, were the hottest digital assets over the summer.
With annual yields in the realm of five digits, the DeFi bubble was driven in large part by speculation on a new breed of digital tokens that facilitated finance without centralized intermediaries.
The DeFi Pulse Index that tracks the performance of the top DeFi tokens is now down about 26% since it was created in early September and even FTX’s DeFi Index Perpetual Futures which provides exposure to 25 different DeFi projects is down about 42% over the same period.
And unlike the initial coin offering (ICO) rush of 2017, the DeFi bubble was relatively short lived.
But that should be a welcome development.
Had DeFi continued to rise without check, regulators would no doubt have scrutinized the space more closely, and with a greater urgency, especially since decentralized exchanges do not, and aren’t able to, positively identify users, potentially facilitating money laundering.
While the DeFi tokens themselves have come down from their lofty heights, that too should be seen as a welcome development as the space evolves and stakeholders develop the infrastructure to ensure that progress is sustainable and value-creating.
And the total value locked in DeFi continues to set new records, with some US$12.7 billion still secured via smart contracts, suggesting that while DeFi tokens may have fallen in value, participation, or interest in the space has not waned.
The raison d'être for DeFi hasn’t changed.
Billions of people around the world remain unbanked and lack access to even the most basic financial services.
And as the digital currency ecosystem gains greater global acceptance, especially with over 80% of central banks studying the release of their own central bank-issued digital currencies, the supporting infrastructure for the financial tools that should follow from that will spur more development in DeFi.
As with any other technology cycle, the hype cycles follow a familiar pattern and there’s no reason to believe DeFi should be any different.
The only difference perhaps is that when it’s come to digital assets and cryptocurrencies, these cycles tend to be shorter, which allows engineers to get past the hype and move forward with the hard work of development with less distraction.
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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