FT Weekend Zoom, Bitcoin, Bond vigilantes, Inflation and more


28 Feb

Front Page
US clears path to global deal on taxing big tech groups
• Yellen drops ‘safe harbour’ measure
• European states hail ‘positive’ moveI think the more positive stance being taken by the Biden administration is an acknowledgement of the need to make up for the disruption caused by the Trump administration and one that will be welcomed by many in Europe.  Something that will go a long way to helping the US build an alliance to that China plays by the international norms and is prevented from its recent policy of bilateral arrangements.  This follows Yellen saying the US would drop objections to 'new financial support for low-income countries through an allocation of special drawing rights (SDRs), the IMF’s reserve currency.’Washington blames Saudi prince over scheme to ‘capture or kill’ KhashoggiUS intelligence says Crown Prince Mohammed bin Salman approved the operation, as many have thought.  It will be an embarrassment but little more.
Inside
 ‘Zoom fatigue’ Stanford study turns gaze to stressed home workers (Page 2)Seems reasons for fatigue include '“excessive amounts of close-up eye gaze” and “increased self-evaluation from staring at video of oneself”.’  Solved by turning off the selfie window, reducing the screen size and in some cases just having a phone or conference call without the need for Zoom.Acknowledges that frustrations with Zoom pale in comparison to the frustrations of medical staff at overloaded hospitals. Notes that Zoom’s share price has almost quadrupled in the last year due to the switch.For investors I think that Zoom and video conferencing have a place but post pandemic the use is going be curtailed.  In part because the novelty will have worn thin and also the realisation that a lot of calls can be done via normal phone calls. It also illustrates I think why there will be a return to the office culture.
Read also WeWork has room to shine as city space is reconfigured in the Companies & Markets section.
Thinks that flexible office space will become the Uber of office life. Looks at IWG and WeWork and concludes :
'WeWork has problems that IWG does not, a hangover from its breakneck expansion: it is still losing money and it is encumbered with lots of glitzy city centre sites that are unlikely to be fully occupied for the foreseeable future. The challenge of its model — short-term leases for customers and longer-term leases for itself — persists.
But it has name recognition, deep-pocketed backers and a proven ability to burn billions of dollars and survive. Given endless liquidity to reposition its portfolio, it could be a real business in tomorrow’s world. All it took was a devastating global pandemic and a historically stupid bubble'

UN rebukes 75 nations over climate failures (Page 4)
Report says countries are falling ‘far short’ of goals to cut greenhouse gases. Illustrates how hard the task will be.Key is that 'Just one of the world’s four largest greenhouse gas emitters had submitted its plan in time to be included in the analysis — the EU group of 27 countries. New commitments have yet to be put forward by China, the largest global emitter, the US and India.’Also notes that 'Japan, South Korea, Russia, New Zealand, Switzerland and Australia all delivered plans that failed to improve on their 2015 target. Brazil’s climate plan lacked any goals to cut emissions by 2030.’
Investors have been putting great faith in government commitments to cut emissions but actually setting out a framework to achieving then is no easy matter. China in particular made a particularly bold declaration and has yet to present a road map for achieving its aspirations and without strides in new technology it looks like they might just remain aspirations. For investors the growth in ESG means that it is a becoming a key benchmark for many but ensuring that it does the world good too will be harder.

Seoul sounds the alarm on looming food shortages in North Korea (Page 4)
S Korea’s unification minister is calling for more aid for the people of North Korea. Some are likening the situation to that seen in the mid-1990’s when the Soviets withdrew and famine followed severe droughts and resulted in millions of deaths. Since the start of the pandemic North Korea has closed its borders primarily to protect its fragile healthcare system.The minister raised the potential for a review to see if the sanctions were being effective and that the review should assess the impact on ordinary citizens. He is seeking exemptions for projects that are not linked to military of nuclear programmes; like non-commercial, public infrastructure. Shows the difficulty in dealing with dictatorships that don’t acknowledge international norms. The worry is obviously that Kim resorts to more outlandish tests and projects to try and achieve his aims.

Nigerian investors ignore warnings and plunge into bitcoin (Page 4) Looks at how it has the highest proportion of retail users doing transactions under $10,000.The Central Bank has expressed its concerns that inexperienced investors could lose their meager savings in the highly speculative asset.  The main problems that with the moves in Bitcoin recently most investors are making money and hence not spoiled worried about the potential for loss.
'Nigerians turned to bitcoin when the government froze the bank accounts of leaders of the protests against police brutality that swept the country last autumn. Supporters began donating to the cause using bitcoin, a practice that was encouraged by the likes of Jack Dorsey, Twitter chief executive. The frenzy over digital currencies prompted the central bank to reiterate 2017 guidance prohibiting local banks from serving customers with crypto accounts.’
As the central bank sought to crackdown more people have turned to the asset especially in peer-to-peer markets that allow crypto to be exchanged for real money.Part of the problem seems to be that the fact the central banks has sought to prop up the Nigerian naira; efforts criticised by the IMF and World Bank.
Shows how crypto can be of practical benefit in countries where the normal economy is failing to meet the needs of the people. The risk is in the very speculative nature. Investors in Bitcoin this year have, for the most part done well but many still worry that it could still see the retrenchment of 2017, when it lost 80% of its value. In Nigeria case the bitcoin seems to be replacing the USD and gold as the preferred store of value, I would in part because of the ease with which it can be securely held.


FT BIG READ. FINANCIAL MARKETS The return of the bond vigilantes
The sell-off this week in government bonds reflects concerns that aggressive monetary and fiscal policy will reignite inflationary pressures. That could hamper the economic recovery and unsettle markets.
Quotes Yardeni who first used the phrase in the early 1980’s:
“We’re in a brave new world of excesses in fiscal and monetary policy, and that’s where the bond vigilantes thrive. It’s their job to bring law and order back to the economy when the central banks and the fiscal authorities are lawless. And that’s arguably what we’re seeing here.”
It is interesting that the 1980’s was the last time that inflation was seen to be rising; then as a result of the oil crisis, governments overspending and the self-fulfilling prophecy of higher prices leading to higher wages leading to higher prices. Some of which sounds very familiar.
The current and sell off seems to be on rising expectations of the recovery and concerns that despite assurances that Central Banks can keep inflation in check; that they will not be able too. Some think we will see inflation but it will be only a short term blip (Pimco said that this week, although did stress that the economic environment is unique) others fear that once the genie of inflation is out of the bottle; it's not going away any time soon. Like 'Dan Fuss, vice-chair at US asset manager Loomis Sayles, has seen many cycles through his six-decade career as a bond investor, and he is worried history shows that the scale of the stimulus will inevitably reignite inflation.
'This past week has shown that the world has taken low bond yields as a constant and hence any significant deviation is a cause for worry.'
A worry is that the knee jerk reaction may expose other fault lines in the economy.The post covid economy
It was about a year the pandemic started and investors headed into government bonds for safety, with yields hitting their lows around the summer since when they have started to rebound as a vaccine solution become apparent. They have recently seen an acceleration from Biden winning the election and then the Democrats winning control of the Senate.
Key is that there is no certainty but one big issue is ‘inflation expectations’ and the Fed mentioned controlling these as being a key part. Because it is those that are used to price the future earnings of assets and especially the cash flows of equites.Reacting to turbulence
A lot of people are sceptical about inflation because of 'the scale of the economic devastation left in the wake of the pandemic, and longer-term deflationary forces like ageing demographics and global supply chains.’ Quotes Seth Carpenter of UBS 'envisages only a shortlived inflation burst. Spending on services will surge as lockdowns end, yet spending on goods will probably fall as people choose to visit restaurants and do less shopping online. Furthermore, much of the additional stimulus cash coming into households will go to repaying overdue debts,’Central Banks are stressing they will not tighten until economies have recovered.
'The Reserve Bank of Australia has already restarted its quantitative easing programme, and some analysts expect others may take action to ensure the fixed income rout doesn’t deepen into something more destructive.’
But other think this weeks moves mean the Fed will have to be more aggressive sooner rather than later.
Concludes with 'However, the bond vigilantes’ comeback tour may be shortlived. Robert Michele, chief investment officer at JPMorgan Asset Management, points out that the Fed is still buying $120bn of bonds a month.“ At some point, and it may be now, there will be a capitulation, yields will have gotten too high, and the relentless weight of the bond purchases from the central banks will stabilise the market,” he says. “The asset purchases are relentless. You can’t fight that.”’

I think the only thing that can be said with certainty is that we don’t know. We’ve never seen a pandemic recovery but the amount of stimulus being pushed out by central banks and increasingly backed by fiscal policy makes higher inflation more likely and sooner.
Read also the Editorial Markets set for a bumpy ride back to inflation
Expectations of rising prices are no cause for macroeconomic worries. 'The upshot is simple enough. A faster reflation of the US economy would be a very good thing, but vigilance is needed on the way there. Investors must understand their exposures. Regulators must prepare to address mishaps, making sure important institutions are well-capitalised, and map where market dysfunction could be most dramatic.As for monetary policy, the steady-as-she-goes message Powell gave legislators this week remains right. Indeed, by moderately tightening financing conditions, rising market rates have done some of his job for him.’

Opinion Vaccine passports are a technical and ethical minefield by Melinda Mills who directs the Leverhulme Centre for Demographic Science at Nuffield College, Oxford university.A good read. Concludes 'We also shouldn’t forget we are globally interconnected. When travel resumes, visitors and workers will cross borders and need global standards such the WHO’s Smart Vaccination Certificate. This could be a legal minefield of issues. Human rights and data protection need to be weighed against a duty of care and commercial freedom to act. Governments may make vaccine passports mandatory on economic grounds or to protect public health. Or they may decide to dodge that bullet, but allow businesses to require them instead.
There is also the question of whether a domestic vaccine passport is worth the investment. That depends, of course, on vaccine rollout, virus mutation and other factors. To work, a substantial proportion of the population needs to be vaccinated with universal access, which in most countries is months away. In the meantime, let’s put the pieces of this puzzle together and carefully judge if we like the picture that emerges.’
In Hong Kong we already have ID cards and so in some respects it is less of an issue but she makes the good point that it is about trust in your government and the fact that there will need to be an international standard.
Companies & Markets
Vaccines take shine off rubber glove producers
Top Glove was -22% on February as investors switch from protection plays to recovery plays. That could be significant for China because its export recovery has been driven but PPE and Electronics. A lot of company managed to repurpose production lines fo PPE and have benefitted but now face a less certain future and it may take time for traditional exports to catch up. That will mean this weeks meetings of the National People’s Congress and Chinese People’s Political Consultative Conference will be closely watched as to how China sees its future over the next five years.

Canadian pension fund chief quits after trip to UAE for jab
• Uproar over fast-track inoculation • Region seen as grey market in vaccines
Whilst there may be hesitancy amongst some about getting vaccinated others are prepared to pay to be fast tracked. Notes that Machin trained as a medical doctor, then become an investment banker at Goldman Sachs, before taking the the top job at CPPIB in 2016.

Cruise operators see brighter horizon as vaccines spur bookings
Bruised sector hopes measures such as food apps and medical care can help business revive. There are some very optimistic analysts out there especially considering the Centers for Disease Control and Prevention is placing a lot of requirements on cruise operators. But there does seem to be a lot of demand and some smaller operators have managed to continue operating albeit at lower capacities (30 % to 50% of normal).

Lucid sparks electric vehicle race with Tesla
Carmaker backed by Saudi Arabia grapples with production delay as it prepares to go public via $24bn Spac deal A good read the team originally focused on batteries by ex Tesla employees. It designed and manufactures the batteries for Formula E and that has helped it design better batteries; worth noting that was something that worked for builders of combustion engines too.
Production of cars has been pushed back to 2H 2021and there are questions of whether it can achieve targets as it burns cash. 'But while Lucid has the advantage of learning from Tesla’s successes and failures, the group will also have to face a flurry of new models from traditional manufacturers, in an onslaught analysts are calling “the Empire Strikes Back”.
Arndt Ellinghorst, auto analyst at Bernstein, expects up to 30m electric vehicles will be produced annually by 2030. “There’s no first-mover advantage any more,” he said. “There’s very little tech differentiation in the battery or software left, so all this really comes down to is brand equity and being able to scale fast — manufacturing, service, the whole ecosystem of a car. That’s not easy.”
Rawlinson dismissed the thesis, pointing out that the early efforts by established names such as Audi and Jaguar have all fallen short and claiming that none of the big carmakers currently poses a threat. “This is going to sound incredibly blasé but I’m not worried about any of them,” he said. “I want them to come. Bring it on.”’A complicated structure and still to prove itself but it ticks a lot of boxes.

Red flags raised over cannabis ETF ‘hype’
Cannabis stocks have been on a roll with rising expectations for full federal legalisation in the US pushing many marijuana-related equities to unprecedented highs.'
But investors in the burgeoning array of exchange traded funds tracking the sector are being warned to ensure they understand exactly what it is they are buying. Even some ETF managers are raising red flags.’
Worth a read; it looks like some people may have been using the product not reading the small print.

For interest Person in the News A media star scores with Spacs boom
A former editor’s deal to buy and list a fintech group is the latest example of a Wall Street craze, writes Oliver Barnes. Looks at the career of Joanna Coles who has just joined up with Jon Ledecky, the co-owner of the New York Islanders ice hockey team, have founded several special purpose acquisition companies to target opportunities in emerging markets and among younger consumers.
Worth a read I love the quote '“People who know me would say I’m not motivated by money, though. I’m motivated by curiosity, and that curiosity moves you into different worlds. At the moment, it just so happens that I’m in the financial world.”
Notes one her skills '“Joanna will walk right up to Barack Obama, Mike Bloomberg, David Solomon [of Goldman Sachs] or Brian Chesky at Airbnb and within 30 seconds they’re best pals. That’s a gift.”
Of herself it quotes 'Coles has two more Spacs planned, but she doesn’t intend to finish her career in finance. “In five years' time I could see myself setting off across America with a notepad, deciding to write a book about the history of the Mississippi,” she says. “That’s something I’ve always wanted to do.”'

Businesses tempt green shoppers with ‘buy one, get one tree’ offers
Reforestation schemes attract customers but their quality and impact varies widely.
'Buy a bottle of beer or a bottle of shampoo and someone, somewhere, will plant a tree on your behalf — that is the latest of the promises consumer brands are making to entice eco-conscious shoppers.’
Balances that by noting '“We’re cutting down huge areas of rainforest which are not easy to rebuild,” said Daniela Schmidt, professor in palaeobiology at the University of Bristol. While responsible planting was valuable, she said, “don’t do it at the cost of not protecting the trees we already have.”

Bitcoin lenders look a lot like any other bankers
Looks at the progression of bitcoin towards being real money.
Its progress shows money is not really understood and that it is commercial banks not governments that create money.
In 2014 the Bank of England put out a paper, Money creation in the modern economy, to show how money worked.'University textbooks teach that banks take in deposits, then lend them out. This is exactly backwards, the BoE explained. A commercial bank decides to make the loan first, then it tops up the balance in your account. That top-up is brand-new credit money.’
That is what crypto’s are doing; nothing revolutionary theya re what other banks have been doing for years.
"The work of making fiat credit money better for everyone is just that: work. It takes patient regulation. You have to go out in the world and meet people outside the financial system, then encourage lenders to offer products that will bring them in. It takes arduous negotiation with the people who earn a lot of profit on lending money. None of this will happen on its own just because there’s a new asset in the world. Bitcoin lenders promise something like a new political party — sound money for the people! So far, though, they seem to be just another group of bankers.’

The Long View
Financial stocks look well placed to thrive in bond rout
'Global 10-year interest rates are rising on stronger growth forecasts, putting pressure on expensive areas of equity markets such as technology. Higher rates reduce the value of the future cash flows of such sectors. However, financials have a history of outperformance in such an environment.’Whilst the recent past has been difficult for financials the future is looking better.'In valuation terms, the constituents of the S&P 500 index trade on a multiple of price to expected earnings over the next 12 months of 22.1 times, according to data company FactSet. Financials are the cheapest main group at 14.6 times.’At present the pandemic has not left the banks with lots of bad loans although they have taken large provisions but it is expected those will not be needed.It concludes 'So banks have a brightening fundamental story that could soak up money coming out of recently hot areas of the share market. Could we see a repeat of what happened in 2013? Then US financials rose by one-third and shrugged aside a bond market tantrum that saw a doubling of the 10-year interest rate to 3 per cent.'

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