David Fuller and Eoin Treacy's
Comment of the Day
December - 232021
Merry Christmas and we would like to wish everyone a healthy and prosperous 2022. Comment of the Day and the Subscriber’s Audio & Video will return on December 29th.
Why the Bezzle Matters to the Economy
This article by Michael Pettis for the Carnegie Endowment for International Peace may be of interest to subscribers. Here is a section:
First, the bezzle represents recorded or perceived wealth that does not exist as real wealth (productive capacity), and as such it boosts collective recorded wealth above real economic wealth. This discrepancy gooses GDP growth in at least three ways. One way this happens is that bezzle creates a temporary wealth effect that boosts consumption and investment spending to a level higher than where either normally would have been. A second way is when part of this false wealth shows up either as higher income or higher profits for the entity that benefits from the boost in recorded wealth. A third way is when rising market values collateralize increases in borrowing that are then used either to raise prices further or to increase spending. It is not a coincidence that GDP growth rates are always higher than expected in periods during which a great deal of bezzle is being created.
Second, the reverse is true when the bezzle is directly or indirectly recognized and amortized, as it must eventually be. One or more sectors of the economy (households, businesses, local governments, farmers, or banks) must absorb the loss. As they do, the wealth effect reverses, their lower earnings or profits are reflected in lower-than-expected GDP figures, and they are forced to pay down the debt. Just as it is not simply a coincidence that bezzle is created mainly during economic booms, nor is it a coincidence that it tends to be recognized during economic downturns or financial crises.
Third, bezzle creation seems to be systemic. There are periods, in other words, when it seems that the operation of the financial system errs toward creating bezzle, and these times always seem to be followed by periods in which the bezzle is automatically wrung out of the system.
Fourth, as Galbraith especially pointed out, the bezzle has a self-reinforcing impact on growth in either direction. When it is being created, the illusion of wealth tends to reinforce growth and encourage the creation of more bezzle. When it is being amortized, it tends to inflict additional costs of financial distress on the economy, especially to the extent that it was financed by debt.
Eoin Treacy's view
I find discussion of the bezzle in valuations a useful way of thinking about how the wealth effect is produced and eventually reverses. The Japanese property bubble or China’s property/infrastructure bubble both fit neatly into those terms with the boom and bust of property markets making relatable backdrops for discussion.
What I find particularly interesting at present is the rush on to stake claims in the metaverse. It has captured the imagination of investors and not least because it is being overlaid with the rapid appreciation of NFT tokens.
This report from Redmayne Bentley and this from KGI Securities were kindly forwarded by subscribers. PGIM has also put out a flashy website with the 10 Transformational Technologies Powering the 21st Century.
Bain & Company Technology report calling for a repeat of the roaring 20s and Stanford’s 100-year study of artificial intelligence may also be of interest.
When the bezzle created is virtual there is no way to value it and when there are no income streams it all becomes a question of rarity and liquidity. This article from Loupfunds may also be of interest.
They estimate the size of the NFT market about $7 billion with a $1.25 trillion market opportunity. With that kind of potential multiple who wouldn’t be attracted.
Even more importantly, when those kinds of figures were circulated about bitcoin in 2012 very few people believed them. No one wants to miss out on that kind of opportunity again so money is pouring into the sector. That does not mean value is being created, although it could be. It definitely improves the wealth effect.
Matt Levine opined yesterday that Wall Street bankers feel like their best year ever was outdone by teenagers making millions in the crypto markets. Here is a section:
“There’s always somebody doing better than you,” said Mark Gorton, the founder and chairman of high-frequency trading firm Tower Research Capital. The number of teenagers worth $20 million because they giddily loaded up on crypto can be hard on the ego. “Everyone compares themselves to those people,” Gorton added. “I kind of consciously try not to.”
When the clients and providers of services both feel like they are missing out, that virtually ensures we are going to hear a lot more about metaverse opportunities in 2022.
Meta Platforms/Facebook has made a splashy play on the sector but Meituan Dianping pioneered the wholly integrated experience between the physical and virtual worlds.
From that perspective Yelp is probably more of a metaverse company than many realise.
Unity Software supplies the software to build many of the online platforms that support the metaverse projects. The share is firming from the region of the trend mean.
The Stock Market Is Suffering From Bad Breadth
This article from Bloomberg may be of interest to subscribers. Here is a section:
The problem for money managers is that when the returns of the market are being driven by a handful of stocks, they must own those stocks or risk underperforming the market, which creates continuous demand for those stocks that are leading the market higher no matter what their prices. And it was clear during the small correction late last month that so-called market neutral players had been using Apple, Microsoft and Nvidia as a hedge, because as the market declined, those stocks actually rose, as hedges were unwound.
There have been episodes of declining breadth in the past, and those usually presage large corrections or bear markets. The Nifty 50 episode in the 1960s is one example. But even in the dot-com bubble, breadth declined steadily until March of 2000, at which point there was only one stock standing: Cisco Systems (NASDAQ:CSCO) Inc. When Cisco broke on an earnings report, that was it for the dot-com bubble.
Eoin Treacy's view
This talk of declining breadth has been pervasive over the last month and has led to a great deal of hand wringing among market participants. At least part of the reason for that has been the significant underperformance of the “innovation” stocks relative to the mega-caps. These were sold on the basis of being the next big thing a year ago and have significantly underperformed in 2021.
This screen grab from Bloomberg highlights what percentage of shares are trading above their respective 200-day MAs in various global markets. The 26% reading for the Nasdaq Composite is low. However, what is less remarked on is the 2020 period, when a large number of Nasdaq stocks traded about the 200-day MA, was an outlier.
The Advance/Decline Line for the Nasdaq looks totally different from that for the NYSE or the S&P500. The reason for that divergence is small cap stocks. The NYSE is a much larger cap grouping than the Nasdaq Composite.
It is normal for some form of sorting process to evolve following the rebound from a big decline. Combined monetary and fiscal stimulus lifted values for everything. As that fountain of liquidity is dialled back, it is reasonable to expect a lot greater divergence in performance. That’s why the number of shares trading above their trend means declines. It did the same thing in 2010.
With the Russell 2000 finding support this week. I believe it is quite plausible to expect market breadth to improve in Q1 2022.
Three Sinovac Doses Fail to Protect Against Omicron in Study
This article from Bloomberg may be of interest to subscribers. Here is a section:
While much is still unknown about how Sinovac’s shot holds up to omicron -- including how T cells, the immune system’s weapon against virus-infected cells, will respond -- the initial results are a blow to those who have received CoronaVac. There have been more than 2.3 billion doses of the shot produced and shipped out, mostly in China and the developing world.
With omicron seen to be about 70 times more transmissible than the delta variant, the prospect of having to roll out different boosters or even re-vaccinate with a more omicron-specific vaccine will set back the world’s efforts to exit the pandemic.
Eoin Treacy's view
Evidence has been emerging for months that the primary Chinese made vaccines are ineffective against variants like Delta or Omicron. This article from Reuters focuses on China’s lockdown of Xi’an but highlights that none of the 200 cases found to date are from the Omicron variant. That suggests it is only a matter of time before the newer variant arrives despite the already strict measures to contain the threat already in place.
China’s economic growth is already moderating. The intentional squeeze of the property market and refusal to boost fiscal spending have weighed heavily on consumer sentiment. It’s quite possible that the Omicron variant may be the catalyst necessary to allow the administration to boost spending to support the economy.
Kewichow Moutai (alcohol) is rebounding following a reversion towards the mean and CATL (batteries) remains in a consistent uptrend. These two shares represent almost 10% of the CSI 300 which is firming from the region of the trend mean.
European Gas (ASX:EPG) Plunges 20% as Rally Lures Flotilla of U.S. LNG
This article from Bloomberg may be of interest to subscribers. Here is a section:
European natural gas prices plunged more than 20% on Thursday as this year’s stellar rally attracted a flotilla of U.S. cargoes.
At least 10 vessels are heading to Europe, according to ship-tracking data compiled by Bloomberg. Another 20 ships appear to be crossing the Atlantic, but are yet to declare their final destinations. U.S. cargoes of liquefied natural gas will help offset lower flows from Russia, Europe’s top supplier.
Gas prices in Europe have surged more than sixfold this year as Russia curbed supplies just as pandemic-hit economies reopened, boosting demand. Delayed maintenance work and power-plant outages also contributed to the rally. Prices in Europe are 13 times higher than in the U.S. and the market is also trading at a rare premium to Asia, making the continent a prime destination for LNG.
Eoin Treacy's view
Today’s move in European gas was exacerbated by forecasts for mild weather. Large numbers of cargoes will need to be delivered to improve the low reserves condition currently present in Europe. The market remains at the mercy of the weather so we can anticipate a great deal of volatility over the coming months. Today’s downward dynamic suggests at least a near-term peak.
The wide spread between US and European natural gas prices is going to boost the LNG sector, the only question is about how quickly export volumes can be increased to satiate demand. Exmar continues to firm from the region of the trend mean.
Golar LNG (NASDAQ:GLNG) is also firming from the region of the trend mean.
Cheniere Energy remains in a consistent medium-term uptrend.
The Chart Seminar 2022
Eoin Treacy's view
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop sarah@fullertreacymoney.com a line if you would be interested in attending an event next year, as well as your preferred location. At present the two locations with greatest demand are London and Dubai.
Commentary by Eoin Treacy
Eoin's personal portfolio: stock market long initiated December 21st 2021
Eoin Treacy's view
One of the questions subscribers as most often is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
I opened a long today in the Nasdaq-100 as it continues to bounce from the lower side of its range. I paid 15959 for a March contract.
I increased my platinum long on August 27th paying $1002 for another position. My existing platinum longs were purchased at $1072 and $885. I remain of the view that precious metals are still cheap and are to be bought on significant dips.
I also continue to hold my silver trading position, initiated at $23.7. I will buy more if the current reaction deepens.
I have been saying for months that I have purchase orders below the market in gold and silver. The first of these was triggered on August 9th. I was filled at $1702.3 including spread-bet dealing costs. My original positions were opened in Q4 2020 at $1879.2 and $1818.6. That reduces by average purchase price to $1800.
I still have additional bids in the market below prevailing prices in gold and silver and will leave them in place to take advantage of any possible additional volatility. These are leveraged trading positions rather than medium to long-term investments.
With baby steps trading one must have high conviction prices will recover and the patience to buy on weakness before eventually being proved right; hopefully.
Among my investments, my original position in the VanEck Vectors Gold Miners ETF was purchased on March 25th at $20.12. I bought another unit at $35.79 on December 1st. I continue to shop for opportunities in the gold sector.
My two investment positions in Rolls Royce were purchased at 154.75 and 105p respectively. I also took up the rights issue which has resulted in an average purchase price of 54.63p. Rolls Royce continues to form a first step above the Type-2 base formation.