Inside Edge: February 2021

Friday, February 26, 2021

This week's interesting finds

M2 vs. velocity vs. inflation

All three charts below cover 60 years worth of data. Notice how M2 growth is running at 2X where it was at the peak of the 1970’s.

M2 is a measure of the money supply and is typically watched as an indicator of future inflation

Notice the cliff of velocity in the second chart.

Velocity is a measure of the number of times that the average unit of currency is used to purchase goods and services during a given time.

Makes you wonder what will happen to the third chart when velocity returns to normal.

Fed doesn’t seem to think there will be any impact

The velocity of money hasn’t been this low since 1946. However, Fed Chairman Powell said, “when we studied economics a million years ago, M2 and monetary aggregates generally seemed to have a relationship to economic growth. Right now, I would say the growth in M2, which is quite substantial, doesn’t really have important implications for the economic outlook. M2 was removed some years ago from a standard list of leading indicators. That classic relationship between monetary aggregates and economic growth and the size of the economy no longer holds. We’ve had big growth of monetary aggregates at various times without inflation, so [this relationship is] something we’re going to have to unlearn.”

Have we seen these misguided forecasts before?

Bitcoin

To: InvestmentTeam

Subject: Bitcoin was brought up during the investment team meeting

From Coinbase S-1, a cryptocurrency trading platform

Some of the risk factors:

• the reduction in mining rewards of Bitcoin, including block reward halving events, which are events that occur after a specific period of time which reduces the block reward earned by miners;
• the development and launch timeline of Ethereum 2.0, including the potential migration of Ethereum to a proof-of-stake model;
• disruptions, hacks, splits in the underlying network also known as “forks”, attacks by malicious actors who control a significant portion of the networks’ hash rate such as double spend or 51% attacks, or other similar incidents affecting the Bitcoin or Ethereum blockchain networks;
• hard “forks” resulting in the creation of and divergence into multiple separate networks, such as Bitcoin Cash and Ethereum Classic;
• informal governance led by Bitcoin and Ethereum’s core developers that lead to revisions to the underlying source code or inactions that prevent network scaling, and which evolve over time largely based on self-determined participation, which may result in new changes or updates that affect their speed, security, usability, or value;
• the ability for Bitcoin and Ethereum blockchain networks to resolve significant scaling challenges and increase the volume and speed of transactions;
• the ability to attract and retain developers and customers to use Bitcoin and Ethereum for payment, store of value, unit of accounting, and other intended uses;
• transaction congestion and fees associated with processing transactions on the Bitcoin and Ethereum networks;
• the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins;
• negative perception of Bitcoin or Ethereum;
• development in mathematics, technology, including in digital computing, algebraic geometry, and quantum computing that could result in the cryptography being used by Bitcoin and Ethereum becoming insecure or ineffective; and
• laws and regulations affecting the Bitcoin and Ethereum networks or access to these networks, including a determination that either Bitcoin or Ethereum constitutes a security or other regulated financial instrument under the laws of any jurisdiction.

People collecting unemployment vs people officially unemployed

Friday, February 19, 2021

This week's interesting finds

Asia catching a retail bid? Hong Kong share trading volumes are up 4x since 2019

Stock trading volumes in Hong Kong have soared to four times those on the London Stock Exchange (LSE), as large technology stocks attracted a soaring appetite from foreign investors.

% of IPO that are unprofitable

Green hydrogen plant in Saudi desert aims to amp up clean power

Developers behind the world’s largest planned green hydrogen project hope a growing global thirst for emission-free fuels will pay dividends

The initiative—a joint venture of Neom, U.S. chemical company Air Products & Chemicals Inc., and Saudi Arabia’s ACWA Power—will invest $5 billion to build what will be the world’s largest green hydrogen production facility. Another $2 billion will be invested in distribution infrastructure in consumer markets around the world, primarily to fuel industrial vehicles and public buses.

Plans call for the sprawling facility, which isn’t yet under construction, to produce 650 tons of green hydrogen a day starting in 2025. The facility’s output will dwarf that of a green hydrogen plant in Québec that produces about nine tons a day, making it the largest such facility in the world. The Neom project exemplifies the Kingdom’s ambitious plan to diversify away from oil and natural gas and showcase Neom as a global hub for technology and green energy.

How People Learn to Become Resilient

Frame adversity as a challenge, and you become more flexible and able to deal with it, move on, learn from it, and grow. Focus on it, frame it as a threat, and a potentially traumatic event becomes an enduring problem; you become more inflexible, and more likely to be negatively affected.

Friday, February 12, 2021

This week's interesting finds

Promising data in Israel's race to defeat pandemic

Israeli experts are confident the vaccines rather than lockdown measures brought the numbers down, based on studying different cities, age groups and pre-vaccine lockdowns.

Flocking to tech IPOs

Over the last 12 months investors have flocked to buy shares of newly listed tech companies, believing in the potential of upstarts to transform their sectors. That excitement has given newer firms valuations several times higher than established companies in the same industries—even when those older companies have far more revenue and profits.

Airbnb for example was the largest tech IPO in 2020, with a valuation of about $47 billion at the time it went public in December.

Having since grown to $117.7 billion, Airbnb’s market capitalization makes it more valuable (on paper) than many top hotel chains combined. Marriott, Hyatt and Hilton’s combined market capitalization is roughly $40 billion shy of Airbnb’s, despite their higher revenue.

Examining the recent market and risks

The recent boom and bust in a number of stocks illustrates how capital markets over the short-term can be driven by flows and investor positioning, rather than by the underlying fundamentals of businesses. Some argue that the primary causes of this market dysfunction are the prevalence of passive investing and leverage.

The effort to squeeze short-sellers took GameStop’s share price well beyond any rational fundamental valuation. It soared by 23 times within 11 trading days as those who had bet the price would fall were forced to buy shares to cover their obligations.

One factor that made the GameStop squeeze so profound was passive ownership. About one quarter of the available shares were owned by passive investors. These funds run on autopilot. As new money comes in, it is allocated to keep a constant balance among a specific combination of individual stocks or other assets. As GameStop’s price rose to ridiculous heights, those passive funds were almost certainly buying to maintain their balance.

Passive funds have a much greater impact on prices because active investors can be patient in deploying their capital and are sensitive to the prices they pay. Passive funds have little discretion whether and at what price to buy — they must buy if they have inflows. Perversely, passive funds’ demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases. So long as such funds have inflows, they do not sell.

Leverage linked to low interest rates turbocharges these unhealthy dynamics.

Here's a Silly Game That Should Make Stocks Go Up

People have long been conditioned to see whether companies have “beaten” their expectations. And as Savita Subramanian of BofA Securities Inc. demonstrates here, the percentage of S&P 500 companies beating estimates for both sales and profits is very nearly at the record set in the third quarter of last year.

Specifically on sales, the number most directly tied to the performance of the economy, more companies than ever before are outstripping forecasts.

We should know by now that the earnings forecast game is a little silly. Particularly in the U.S., CFOs have grown adept at talking down expectations ahead of results, and then reaping the positive performance bump when they “beat” a lower bar.

Feedback Loops & GameStop, GM and Sears

Morgan Housel examines why GameStop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook.

Stuck at home with just some cash and free trades