Blain’s Morning Porridge – Nov 29th: Binance, China, Covid and Tech Value – what a mix!
“The more simple it is – the more complex it will sound….”
This morning: Markets love drama… from the next corupto-coin exchange to collapse, rising interest rate threats, and riots in China in the face of a Covid meltdown. But drama and reality seldom coincide – events are more prosaic!
Apparently not-yet collapsed corypto-exchange Binance is “absolutely safe”… and has just revealed a “proof-of-reserves” system that shows they have a reserve ratio of 101% of whatevers… and that their own funds are definitely not co-mingled with customer assets, definitely not. Blah, blah, bla-bla, blah! Binance is the last exchange standing in these last-days-of-corypto, run by Changpeng Zhao – a shoe-in for the next bond villain, who seems pretty much to have trigged the FTX collapse by pointing out it was stark bollox naked.
It’s all very rationally explained: “Thanks to the Merkle tree, individual users can use the root hash to check whether their accounts are included in the snapshot of user balances. The company also provides a short Python script so that you can check yourself.” Really?
Well… I’m glad they made that clear. It’s the simplicity of Corupto-Currencies that I particularly admire… Binance even has an emergency rainy-day fund (called, somewhat charmingly SAFU (which I posit stands for: “Situation all F*ck*d Up”) for extreme cases of market moves. (Seriously.. not making that up!) Doesn’t it make you feel more secure about all the money you’re still going to lose in Corupto-coins?
Back in the real world….
The obvious big news in markets is the Fed warning of interest rates remaining higher for longer to address inflationary pressures, even as inverted yield curves scream recession. The Jobs data on Friday is likely to be “robust”, further fuelling the Fed’s confidence to keep up the pace of rate hikes to slow prices growth. The other big news was China….
I was reading a report from Nomura that reckons Covid restrictions are “negatively affecting” over 25.1% of China’s GDP – up from 21.2% at the previous peak in restrictions in April. That’s a massive dent on the economy – which we in the west simply perceive as the 6 million iPhones that won’t be delivered, or the looming shortage of auto chips. What if we look at it the other way – when China reopens, that’s a massive normalisation in supply that’s going to hit global markets at some point? The upside from China reopening could be immense, and calm recession fears.
But… no one is talking China reopening at present.
Yesterday the market had a bad case of over-reaction to the news of Covid riots. Headlines across all the media – about protestors calling for the fall of Xi – got everyone terribly overexcited. The BBC even wheeled out veteran foreign correspondent and editor John Simpson to ramble on about it being the most significant protests since Tiananmen Square back in 1989! Yet, old China hands will tell you China has a long and vigorous history of low threshold local and regional protest – and we should not read too much into the current “street protests”.
The thing is – Markets like drama!
There is nothing like some hyperbole to panic markets into the impression Imperial China is on the brink of social collapse, creating another supply-side shock that will rock global economies. Probably not – under the CCP, repression is not far from the surface. But, even if the state does intervene forcibly to root out dissent, it could still get very messy in the Middle Kingdom – if Covid runs unchecked. But will it?
The real issue is not just how unhappy Chinese protestors are, or how far the authorities will go to “quieten” them – but the potential consequences of the last three-years of Zero-Covid policies. Many think China and its population are unprepared for a Covid breakout – which is why the onus is on continuing lockdowns.
Last night the BBC went full on imminent China-Covid black-death meltdown and said elderly Chinese are particularly vulnerable with only around 20% of Chinese over 80 and 50% of those over 60% are actually vaccinated. The local domestic vaccines have a much lower efficacy rate at around 70% compared to 90%+ for Western jabs, and are not designed to address the latest Omicron variants. While China does trail in terms of vaccinations – the numbers aren’t so bad. According to Asian data, over 70% of 60-80s have had third boosters, and nearly 40% of 80 year olds.
What is very worrying is Hong Kong shows the highest death rate on Earth at 1399 people per million cases this year. That strongly suggests the latest omicron-versions could hit China with much more serious consequences than they did in the west, where we have built up a degree of immunity from infections and vaccinations, with clear positive effects in bringing down hospitalisations – as we are seeing as Covid infection rise in Europe. Or it might mean, the Chinese have simply been more diligent in attributing Covid Deaths.
Don’t underestimate the sheer scale of the Covid issue now facing China. The risk is when Covid runs riot across China the lack of built-up resistance will quickly swamp the medical services. However, Chinese infection numbers released this morning actually show declining numbers of infections (down from 40K last week to 38K), zero deaths and that most cases are asymptomatic.
Covid and China – keep an eye on it… Its likely to set the global recession severity number.
I’ve been looking closely at the tech market bust this year. I need to get my head around what is value and what is not! Back in October I wrote a morning porridge about the Judder Moment in Tech stocks – the moment we can to realise just how over their market dominance is. I am still reassessing my whole outlook on winners and losers and where to place my bets – but there is value out there.
This morning I’ve been reading about the Liontrust GF Tortoise Fund. While much of the market has been taking a big negative bet on Meta Platforms – which most of us still call Facebook, Tortoise is being “sensibly contrarian” on the basis many former high flying disruptive tech stocks are now at levels that make them value stocks today. At 11 times earnings and a healthy cash position, strong user numbers and cost cutting – its actually got value… perhaps?
Tortoise is now long a number of tech firms, and having been in the top percentile for long/short funds last year – it’s worth taking a look.
Five Things To Read This Morning
(If there is one thing you read this week, its Michael Moritz (partner at Sequoia) and his take on the real value of Man Utd! It’s a utterly brilliant takedown..)
Out of time, and back to the day job
Strategist – Shard Capital