Speculation boosts stocks, baseball cards

Plus oil’s new ‘supercycle,’ Ecuador’s decision, bitcoin, Nvidia, and TikTok lives

Thank you for reading another edition of Contention! This one should take about eight minutes to read. This week we cover:

  1. Speculation boosts stocks, baseball cards

  2. Oil prices rise on ‘supercycle’ hopes

  3. Ecuador’s election stalls amid U.S. meddling

  4. Rapid Round: Bitcoin domesticates, chipmakers object to Nvidia-Arm, TikTok survives

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Speculation boosts stocks, baseball cards

Stocks continued their bull run last week, powered by new hopes for major fiscal stimulus and an improving pandemic landscape in rich countries. The Dow was up 1%, the S&P 500 1.2%, and the Nasdaq 1.7%.

In fact, the news has gotten so good for investors that they now seem to be in the throes of market euphoria “nonsense.” How this plays out in the coming months should define business news for some time.

The euphoria follows some good news on leading economic indicators: temporary staffing numbers last week turned positive for the first time since last March, and economists revised 2021 GDP forecasts upwards

But the Federal Reserve and federal government aren’t letting up yet, and analysts anticipate that the “expected liquidity” from their ongoing stimulus to keep bidding up asset prices in what appears to be a speculative bubble. 

The “Buffett Indicator” -- the ratio between total stock market capitalization and U.S. GDP favored by billionaire Warren Buffett as a warning sign for overheated markets -- is 64% over its historic average, second only to the dot-com bust when it hit 71%. 

Some of that makes sense: companies really are seeing major earnings growth right now, with tech stocks beating expectations 90% of the time. But new data indicate that Robinhood traders alone drove 7% of stock price variation in one quarter last year, with an even bigger impact on the smallest quintile of stocks -- 30%. Because the largest institutional and automated investors passively follow index moves, big money added momentum to the retail speculation, fueling the boom.

This speculative impulse is especially visible in the frenzy over “SPACs” -- special purpose acquisition companies, or “blank check companies.” Hedge funds and other major investors bring SPACs to market through IPOs with no assets or business plans other than a promise to buy a private company in the future. Buyers then get a piece of the newly public company, but until then the SPAC is actually worthless. 

Despite this, SPACs are now gaining an average of 6.5% on their first days, six times their historic average. This gain has very little justification -- former SPACs historically lose 15.6% of their value in the year after their mergers. Now private companies are playing SPACs against each other in a “SPAC-off” where overvaluation becomes even more likely. 

Still, at least there is a chance for return on capital somewhere down the line with a SPAC. One exploding asset class that can’t claim that -- trading cards, i.e. pieces of paper. Last month a Michael Jordan rookie card sold for $738,000, more than triple the $215,000 another “investor” paid for it just weeks earlier. Now hedge funds are moving into the space, with companies offering fractional shares in certain cards through IPOs. 

Speculative bubbles have a lot of technical definitions, but a widespread suspension of disbelief and self-deluded arguments in support of absurd price moves are universal symptoms. Right now the investor class clearly has a fever -- things should get wild when it breaks. 

Oil prices rise on ‘supercycle’ hopes

Oil futures ended their longest winning streak in two years last week, with slight dips following eight straight daily gains for West Texas Intermediate crude and nine for Brent. Their $57-$62 levels match those last encountered before the pandemic bust last year. 

Driving the boom: speculation, China, and the energy transition demanded by the climate crisis. The implications for markets at large could be huge. 

This re-pricing reflects changes in both demand and supply. Short term, OPEC and the International Energy Agency predict that vaccine-fueled economic recoveries will drive new demand later in the year

Longer term, both JPMorgan Chase’s Marko Kolanovic and Goldman Sachs are predicting the dawn of a new “commodity supercycle' driving up prices. The last cycle saw a 12-year surge peak in 2008 with an historic price shock, and then a 12-year slump bottom out with negative futures prices last year. China’s rapid growth fueled the last upswing, and as the world’s only growing major economy last year its oil purchases in January underwrote recent price gains. Kolanovic and Goldman expect this trend to continue.

Kolanovic also believes that financial flows will be even more important than fundamentals to the new cycle. Central banks have boosted global liquidity by buying up bonds, bidding up their prices and driving down their interest rates. Yield-starved investors have moved into riskier assets like stocks, driving their prices up too. 

Stocks and bonds have historically hedged one another -- when one was going up in price, the other went down. Unconventional monetary policy means these asset classes are now correlated, so big capital holders now need new hedges. Commodities are the best candidate: inflation drives interest rates up and stock and bond prices down while simultaneously raising commodity prices. 

With commodity-linked financial instruments easier than ever to buy and low interest rates making leverage easier than ever to access, financial speculation could send commodity prices soaring.

This demand -- production-focused in China, finance-focused in the West -- will meet limited supply. Oil majors cut $20 billion from capital expenditures on exploration and production last year, and the Biden administration expects to introduce new barriers to fossil fuel infrastructure. Smart money is flowing into environmental, social, and governance (ESG) funds, with 2020 U.S. inflows more than doubling the previous record. Oil and gas looks like a comparative, risky loser.

The resulting bottleneck in commodity flows will only accelerate price gains -- according to the hypothesis -- with consequences rippling throughout the economy. Energy costs show up in every production process, and expensive fossil fuels make alternative energy more competitive, driving up demand for batteries and their associated metals. As we’ve noted before, such widespread price instability could rock the global monetary system. Before the pandemic four of the last five recessions began with oil price shocks.  

There are many unknowns in this scenario, but one thread runs throughout: a shift in the balance of economic power and frantic attempts by large capital holders to try and adjust. Each move poses big threats to price stability, accelerating the change even further. Stay tuned at the pump to see where this round leads.

Ecuador’s election stalls amid U.S. meddling

Ecuador’s presidential election remained in limbo last week as two candidates disputed the second place results in Monday’s contest, each seeking the right to face first-place finisher Andres Arauz in an April 11 runoff. 

The episode is the latest in a sordid saga of U.S.-led attempts to keep the resource-rich country under the thumb of international creditors.

The election’s first round ended with the socialist Arauz easily securing the lead with 32.7% of the vote, while right-wing banker Guillermo Lasso and indigenous “eco-socialist” candidate Yaku Pérez were neck-and-neck, each with just under 20% of the vote. On Friday, the country’s National Election Commission (CNE) ordered a partial recount

Arauz, Lasso, and Pérez are competing to lead Ecuador through one of the world’s worst pandemic crises. The country has Latin America’s highest per capita death rate from the virus, and the resulting economic devastation has more than doubled poverty to 58% of the population. Extreme poverty went from 9.2% in 2019 to 39% in 2020. 

Driving the catastrophe: IMF “fiscal consolidation.” The fund lent the country $4.2 billion in 2019 and pressed the government of Pres. Lenín Moreno to eliminate fuel subsidies, cut public sector jobs, and raise consumption taxes. Mass demonstrations forced the National Assembly to reject most of the measures, though between 2,500 and 3,500 public healthcare workers still lost their jobs. Public health spending overall dropped 64% in just two years. 

Moreno’s government used a state of emergency last March to re-enact the rejected policies, and fired an additional 11,820 public sector workers in May. In September, Moreno agreed to a new $6.5 billion loan from the IMF with additional austerity requirements including tax increases targeted to the elderly

Arauz -- protege of the socialist former president Rafael Correa -- has pledged to ignore the IMF’s demands, seeking "first to defend Ecuadorian families before prioritizing international creditors." To buy himself some bargaining room Arauz has argued for closer economic ties to China and expressed interest in a new digital currency that could end-run possible U.S. sanctions

Pro-U.S. business interests have not taken this threat lying down. Moreno purged the CNE of any Correista sympathizers, and the commission in turn shut down polling places in left-leaning areas, leading to unprecedented delays. 

Even more audacious, the “eco-socialist” Pérez appears to be backed by Western business interests. His Pachakutik party is a long-time recipient of funding from the National Endowment for Democracy, a CIA-created fund for pro-U.S. political movements abroad. The Americas Society/Council of the Americas -- the main corporate lobbying group representing large U.S. companies in Latin America -- even went so far as to celebrate him as “the new face of the Ecuador’s left.”

Now Colombia’s attorney general has accused Arauz of receiving funding from the ELN guerrilla army, a red flag that Moreno and the CNE may disqualify Arauz from the runoff. If this happens, investors can look forward to demanding asset sales to finance predatory credit. 

The bottom line: the battle for Ecuador’s second place takes a backseat to the battle between Wall Street and the country’s suffering people.

Rapid Round

Coinholders hoard crypto, institutions move in

Bitcoin broke through institutional barriers last week as the signature cryptocurrency's price approached $50,000 per "coin." Among the news:

It's not clear yet how Mastercard and Tesla will handle bitcoin and other crypto as an open and decentralized payment system circulating through standard, regulated financial networks. This contradiction helped kill Facebook's Libra project -- since rebranded as Diem. For Tesla, there are questions whether the company will get much bitcoin for buying cars considering volatility that can fluctuate wildly by the day.

This reluctance to spend makes the “currency” a very inefficient one. 60% coins haven't moved in more than a year, with the average hold time exceeding 1,000 days in January. Dogecoin, on the other hand, is up 1,300% apropos of nothing, making the joke coin worth more than Western Union. 

Competitors seek to block Nvida’s Arm grab

Qualcomm, Google and Microsoft have objected to regulators in the United States, Britain, and China regarding Nvidia’s proposed takeover of British chip designer Arm. The root of their resistance? Intersecting great power conflicts and business rivalries that threaten to choke off competition.

Nvidia first announced its intention to buy Arm from Japan’s SoftBank in September for $40 billion. If the deal goes through, it would give Nvidia -- whose GPUs comprise a 97% market share in the Big 4 clouds -- control over Arm’s instruction set architecture (ISAs) which dominates the mobile phone market. Nivida’s control over Arm’s ISAs concerns China, as it could mean U.S. government embargoes of the architecture. 

An acquisition would likewise be a threat to Nvidia’s competitors who fear the company will block their access to Arm’s technology -- while boosting Nvidia’s work in artificial intelligence. Nvidia CEO Jensen Huang said the competitors shouldn’t worry: “We have no intention to ‘throttle’ or ‘deny’ Arm’s supply to any customer.”

TikTok wins in U.S. -- for now

The Biden administration has “indefinitely” shelved plans drawn up under former Pres. Donald Trump to ban TikTok and WeChat, apps owned by Chinese tech giants ByteDance and Tencent. 

In response, ByteDance cancelled a proposal to sell TikTok to a consortium led by Oracle and Walmart, a potential compromise for a ban which is no longer a threat. ByteDance says it is continuing to talk with the U.S. government, but has ruled out any sale of core algorithms essential to its business. 

It’s a different story in India, which extended “permanent” bans on TikTok and 58 other Chinese apps in late January. ByteDance has since unwound its India operations and is working with SoftBank, which has investments in the Chinese firm, to salvage their assets in the country. One possibility: selling these assets to Glance, a Bangalore-based mobile content provider backed by Mithril Capital -- an American hedge fund owned by Palantir’s Peter Thiel.


Disclaimer

Our only investment advice: Celebrate Dead Prez Day.

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