New Beginnings


Analysis / Thought

The core theme coming out of the gate of the New Year is a parabolic move higher in Bitcoin on the backdrop of VanEck getting a Bitcoin ETF. This moves the Zeitgeist into one of “fiat debasement” - where, essentially large institutions believed that Central Banks have jumped the shark with their talks of “Debt as Wealth”, MMT, and so forth. With 10 year breakevens at 2%, the Fed’s target, we are increasingly at the point where the discussion becomes letting the economy run “hot”. This is in a backdrop of large increases in Food prices and analysis by things like the Chapwood Index which suggest that annual core CPI in cities is really closer to 10 or 11% per annum and has been for the past 5 years Source

This theme is only likely to accelerate with the possibility of a Blue Wave looking increasingly likely. Osoff is speaking charismatically in Georgia, and odds markets are now above 50%.

All things being equal - these moves would signal continuation of major asset moves.

  1. Higher oil prices as Biden removes subsidies, and a Blue Wave complicates exploration and extraction due to climate goals
  2. A lower dollar and higher 30 year interest rates as the fiscal situation deteriorates out of control. The move lower in the dollar should be augmented by the picture of the US as geopolitically unstable, with Trump dividing republicans and attempting to blackmail the Georgia governor.
  3. Lower US energy sector prices.
  4. Continued bid in sectors benefited by fiscal spending - namely clean energy, and infrastructure at the expense of big tech - due to the perception that the dems will legislate Big Tech.

This is complicated by two factors; consensus positioning, and the acceleration of COVID’s new UK strain. First re: positioning. The fact European equities and the Euro traded quite poorly in the wake of the surprise China trade deal with the EU last week suggests that the buy side is over their skis long the Euro on fiscal solidarity. This probably makes less sense than one might expect – because countries like Italy and Spain will be asymmetrically hurt by the lockdown, and even if they can borrow at lower rates - will be progressively less supportive of centralized decisionmaking. The realization that COVID can mutate introduces unpredictability into the efficacy of vaccines Source.

Furthermore – there are a number of perverse incentives at play to justify continuing to lock down the economy. Namely - 1) high tech weights in the S&P 500 and declining energy weights. Companies like Amazon tend to do well with covid news. Thus, the S&P and lobbyists are indifferent to new lockdowns. 2) increase of political power. Politicians are enjoying their max power at the moment, and states rarely relinquish power willingly. Thus - given incremental news flow, I think it is likely that this week - Travel names, and “cancellation of the virus” trades will radically underperform technology stocks.

However - due to the Fed’s targeting of the virus / tendency to include it in policy decisions, I believe it is likely that there will be accelerated asset purchases. Rather than outright shorting stocks then, not fighting the fed would entail buying Gold, Agricultural commodities, and TIPs and short selling HY and Emerging Markets debt.

I believe the consensus positioning in Euro shows what can likely happen to the Clean Energy sector (ICLN) even if a Blue Wave happens. I believe that Dr. Rita Baranwal’s Twitter Account is strongly foreshadowing a parabolic increase in Uranium and Nuclear energy plays Source potentially at the expense of Solar (esp with Bill Gates production experiment to blot out / dim the sun in Sweden.) Energy.gov has almost read like a stock promotion account for the nuclear sector. Given the small market caps of the names involved (Cameco at $5b vs names like RUN at $14B) - I believe this could be a triple digit move in a month.

Biden’s hiring of a prominent Facebook attorney as a staff advisor, removes gap risk from Section 230 along with the Senate override of Trump’s veto (which highlighted 230 as an issue) was an underdiscussed story in the last week. Source Furthermore, Trump DOJ’s antagonism towards Google, and Twitter are unlikely to be reiterated by the Biden admin. On the flip side - Biden’s nomination of Kahl as national security adviser would suggest heightened geopolitical tension towards Russia Source. The New York times and other magazines are drumming up fears about Russian Cyber security. Source. This creates the argument that a basket of Cyber security names is an appropriate position to run alongside core Big Tech longs.

In the meanwhile, over the weekend, China made very dovish comments re: the Biden administration. It’s very clear the Media is focusing on Russia in order to provide Anthony Blinken’s extremely pro-China agenda to fly without much political scrutiny. This makes the risk reward to owning Chinese Internet due to a blue wave compelling. The potential of $2000 checks making PS5 purchases more likely also makes an interesting set up for Sony.

News over the weekend re: large EU grants to ASML will further provide a lift to foreign tech.

Boiling it all down into a book:

1 Foreign Tech Book (30% of Capital)

Core thesis of this book is that ECB keeps printing, that Russia is scapegoated for global problems to the benefit of China, and that European tech stimulus finds its way into European growth stocks at the expense of Value stocks especially due to viral acceleration.

  • Chinternet (CQQQ) : +3%
  • ASML (ASML Semi) : +2%
  • Sony (SNE) : +1%
  • Spotify (SPOT) - Spotify: +1%
  • AstraZeneca (AZN) : +1%
  • Yandex (YNDX) - : -2%
  • Europe Value (EFV) : -5%
  • EMB - EM Debt: -10%
  • IAGG - Intl Treasuries: +5%

2 US “Green Old Deal Book” (20% of Cap)

This book expresses the idea that Nuclear is the focus of the Biden admin’s clean energy focus. Similarly, Nuclear powering hydrogen production is a big narrative from the DOE. Russia and Emerging markets focused on travel and energy are funding shorts, as it’s likely a virus mutation weakens the Astra Zeneca story (constant MRNA updates needed etc).

  • Nextera (NEE): +1.5%
  • Cameco (CCJ): +1.5%
  • Linde (LIN): +1%
  • Ormat (ORA): .5%
  • Ballard Power (BLDP): .5%
  • NRG (NRG): +1%
  • BHP Billiton (BHP): +1%
  • Vale (VALE): +1%
  • Lithium ETF (LIT): +1%
  • Chile (CHL): +1%
  • Russia (RSX): -5%
  • Saudi (KSA): -3%
  • Thailand (THD): -2%

3 Blue Wave Laggards (11% of Cap)

With ICLN pricing in massive likelihood of a blue wave, as are many assets, International energy and sustainable infra vs MReits are appealing risk reward as Biden follows through with threats to curtail energy production and a Democratic senate can put into place eviction bans which could lower housing prices and hurt MReits.

  • British Petroleum (BP): .5%
  • Equinor (EQNR): .5%
  • International Energy (IXC): 3%
  • Hannon Armstrong Sustainable Infra (HASI): +2%
  • US Energy (XLE): -3%
  • US MREITs (REM): -2%

4 Virus Acceleration (22% of Capital)

The basic bet here is that Biden is a lot more friendly to big Tech than the market realizes, and that will begin to price in this week as people think deeply about Blue Wave gap moves. Facebook banning voter ads from Republicans in Georgia… here we go

  • Facebook (FB): +1.5%
  • Google (GOOG): +1%
  • Amazon (AMZN): +1%
  • Activision (ATVI): +.5%
  • Square (SQ): +.5%
  • Comcast (CMCSA): +.5%
  • Zoom (ZM): +.5%

  • Regional Banks (KRE): -2.5%
  • High Yield Debt (HYG): -8%
  • TIPs (TIP): +6%

5 Commodity Inflation (8% of Capital)

I like the story of Vietnam increasingly being a destination for low cost inputs / manufacturing, which is a story played out in Last Week’s data. Should benefit from declining energy costs as well without being hit too badly from a covid accel. Low volatility Emerging Markets, mostly mega caps, I think underperform as people looking to play offense on the USD and energy weights hold it down.

  • DBA (Agriculture): +1.5%
  • Vietnam (VNM): +2.5%
  • EM Low Volatility (EEMV): -4%

6 UK Tech Narrative (4% of Capital)

Ultimately, think the UK is really picking up steam as an international tech hub and as the USD weakness story decelerates I think GBPUSD trades higher.

  • Long GBPUSD (FXB): +4%

7 IG Corporate Steepener (16% of Capital)

I think the Fed’s ability to absorb the front end of the curve is far higher in the near term absent Yellen coming out and making a policy statement about duration. This moves the narrative out to the defecit and being anti-corporate. The 50 bps of yield pick up you get for underwriting an obscene amount of policy risk with breakevens north of 2% feels unreasonable

  • Long USIG +10%
  • Short VCLT -6%

8 Cyber Security (6% of Capital)

Biden said there was going to be a massive investment and I believe we should take him at face value. At the same time the regulatory environment for Telco, net neutrality etc makes cable players likely a short

  • Long BUG +3%
  • Short VZ -1.5%
  • Short CHTR -1.5%

MACRO TAKES AND HEADLINES

US Bullish:

  • Mania. “U.S. companies sold $368 billion in new stock last year, 54% more than the prior high, according to data compiled by Bloomberg.” Source
  • Foundries are at capacity due to Semiconductor growth implying a strong tech sector Source: Trendforce
  • Tesla modestly beats delivery estimates (500k vehicles) Source : PR
  • Redbook 8.9% year on year vs 6.5% last
  • Chicago PMI surprises to the upside and US continuing & initial claims are below consensus
  • Fauci reasserting positivity on Vaccine Roll out. ““We have an agreement with CVS and Walgreens, and we are starting to ship vaccines to those locations as allocated by the states – that is really the key point.” Source: BBG

US Bearish:

  • AOC engages in political blacklisting of rivals after previously calling to make persecution lists. Hawley escalates Trump contetested election narrative. Source: Twitter
  • China is allying with Russia. In developing China-Russia strategic cooperation, we see no limit, no forbidden zone and no ceiling to how far this cooperation can go,” he said.” Source: Xinhua
  • Dallas FEd Manufacturing Decelerated
  • “Zombie firms are sitting on an unprecedented $2 trillion of obligations. Budget Balance is 20% of GDP” Source: Bloomberg

Asia Bullish

  • Re: the Astrazeneca Vaccine: “It doesn’t need to be kept at ultra-low temperatures and will cost about $4 a dose, compared to the $20 per vial from Pfizer and $33 for Moderna’s (NASDAQ:MRNA) vaccine.”
  • Japan Housing starts beat: -3.7% vs -4.9% expected. Seems positive.
  • Some positive commentary re: the Chinese on Biden admin intentions Source: Xinhua
  • Spike in Chinese train travel, reaches +5.1% GDP, an implicit guidance for GDP growth Source: Xinhua
  • Massive Li Auto delivery number. “The Company’s deliveries for the fourth quarter reached 14,464, 67.0% higher than those for the third quarter and 20.5% above the top end of the Company’s guidance.”Source: PR
  • Deeper integration with China / Chile / Belt and Road. Source: Economist Article
  • Vietnam CPI .19% showing minimal inflationary prolems with 4.48% GDP growth and 9.5% industrial production. $20B FDI is an acceleration vs 17.2$B last
  • HK Imports and Exports increased 5%+ month on month

Asia Bearish

  • The NYSE’s delisting of China Mobile has provoked the CCP to make a statement re: intending to harm US investors. “The move will not only harm the legitimate rights and interests of Chinese enterprises, but also the interests of investors from other countries, including the United States, said the spokesperson, adding that it will seriously weaken the confidence of all parties in the U.S. capital market.”. Source: Xinhua
  • Japan Construction Orders -4.7% yoy vs -.1% yoy last, signaling declining confidence
  • Chinese Industrial profit YoY 15.5% vs 28.8% last, a marked derivative acceleration
  • Large Japanese Industrial production miss (0% vs 1.2% expects, 4% last)
  • Korean indusrial production misses .5% vs 1% expects with retail sales month on month at -1%
  • At the end of the day, Asia is still locked down Macau GGR down 20%

Europe Bullish

  • Contrarian narrative on UK seed investing. “UK technology companies attracted a record $15bn (£11.2bn) in venture capital funding in 2020, including the creation of seven “unicorn” firms valued at more than $1bn. The firms raised more money from VC investors than the rest of Europe combined, according to research by the data provider Dealroom. The $15bn total compares with the previous record of $14.8bn in 2019.” Source: The Guardian
  • UK housing prices up 7.3% year on year vs 6.7% expects and 6.5% last
  • Major beat on KOF Switzerland leading indicator at 104.3 vs 100.5 expects

Europe Bearish

  • Spanish Retail Sales were -4.3% yoy vs -3% last, signlading deterioration

Commodity Bullish

  • “Third, although the U.S. is oil self-sufficient and became the biggest producer in the world for the first time in 70 years, the drilling rig count fell by 75%. It has begun to recover, Finley said, but it is still only one-third of pre-Covid 19 levels and well below what’s needed to stabilize production.” Chicago Fed Commentary
  • Water shortages are bullish for crop prices. Chinese water shortage narrative trending Economist
  • Strong South African Trade balance in November 36.7$B vs 23$B expects
  • Brazilian unemployment surprises 14.3% vs 14.7% expects with inflation surprising to the downside
  • Absurd crude draw: -4.8 M BBL v -2.1 expected vs 2.7 last
  • India granted emergency approval for the virus vaccine developed by AstraZeneca Plc and the University of Oxford.

Commodity Bearish

  • Vaccine shortages highlight that shutdowns likely to extend til summer. Economist Tweet
  • Huge beat in distillate stocks w 3.095m vs .52 expects
  • Brazilian budget surplus surprises to the downside @ -18B vs -9$B expects and last +2.95B
  • Oregon Covid escalation – more deaths. Argues further lockdowns. Oregon News

Bond Bullish

  • New York Fed outlines thinking around geopolitical interconnectedness in paper re: Chinese slow down. Signals potential further justification for money printing New York Fed Paper
  • Municipalities bearish commentary about budget strains likely justifies more money printing. Non profits similarly disastrous “In fiscal year 2020, state revenue declined 1% for the first time since the Great Recession, and states expect greater revenue declines ahead. While state income tax returns reflected a strong 2019, 2021 will reflect the downturn in 2020, Kerns said…. Going forward, Newberger sees a dire situation for nonprofits, adding that 10% to 40% may close their doors for lack of funds… At the end of the day, those speaking to the current economic issues facing major industrial, business, and nonprofit sectors made it clear that the U.S. economy faces serious challenges, sparked largely by the Covid-19 pandemic. At the same time, these speakers expressed some optimism. They said they expect to see a slow uptick in economic activity overall in 2021, but believe it will likely be 2022 before economic life returns to what we perceive as normal.” Chicago Fed Commentary
  • Record Arkansas case load, implying post holiday surge in Covid cases is real Source: Asa Hutchinson Similar surge in Florida
  • Reflation is now consensus. “ Over the past week, the eurodollar options market has seen rising demand for structures that would profit from higher Treasury yields and a steeper yield curve – trades that could pay off if Democrats win both races to secure a Senate majority.” Bloomberg

Bond Bearish

  • Democratic Senate odds surge to over 50% on FTX. FTX Website. “Perdue’s chance for last-minute barnstorming was curtailed after he decided to quarantine after coming into close contact with someone who tested positive for coronavirus, meaning he’ll likely skip Trump’s Monday rally and his own event on election night … “A photo of Loeffler posing beside a former Ku Klux Klan leader – she says she was unaware of his affiliation – bolstered those perceptions, said Bruce, along with her earlier criticisms of the Black Lives Matter movement.”Source Bloomberg

  • Trump continues to sow division in Republican party, making it clear he will be a force of Chaos. This removes any barrier to extreme fiscal outlooks / MMT, blue wave policiies. SourceTrump Twitter
  • Fed continues to argue weaponizing the Treasury to accomplish political objectives SourceYellen Twitter Account
  • Yellen embraces populist monetary policy. Source: Yellen Twitter Account