ForEver grande crash

By Marius-Cristian Frunza
Weekly Briefs

When the subprime crisis hit the American economy and financial markets in 2008, many voices shouted for the end of capitalism. A decade later, Evergrande, China’s second-largest real-estate developer, entered an ineluctable downward spiral facing bankruptcy as the company missed a debt payment deadline. Could we see another systemic event?

“Too big to fail” is a common fallacy stemming from a cognitive dissonance amongst investors, believing that a supreme force will ultimately solve all big problems. If Evergrande goes into default, it will trigger systemic risk alerts.

While consequences for the Chinese financial market could be disastrous, the impact could be milder at a global level. A market crash in China may help the U.S. in the global power struggle between the world’s two leading economies initiated by the Trump administration.

Is there a connection between Evergrande’s foreseeable failure and crypto?

The answer is affirmative.

Ever since John Paulson bet against the U.S. subprime market more than a decade ago, the media refers to him as he would possess the magic crystal ball. “I wouldn’t recommend anyone invest in cryptocurrencies”, Paulson said in an interview on Bloomberg TV. He said that the crypto bubble would “eventually prove to be worthless”, and Bitcoin price would go to zero. However, while Paulson correctly anticipated the previous crisis, he ignores that the entire fiat money system did not become worthless in 2008, even though mathematically, it was not worth more than a dime.  

The principles ruling the dynamics of financial markets are not items in a sushi menu. You cannot pick whatever fits you at a given moment. Both Evergrande and Bitcoin may go through rough times, but their intrinsic worth in the eyes of investors follows a different paradigm. With zero interest rate, for investors, such assets being alive are cheaper than being in default.

Many politicians and pundits claim that the credit crunch and high mortgage foreclosure rate is an example of market failure and want government to step in to bail out creditors and borrowers at the expense of taxpayers who prudently managed their affairs. These financial problems are not market failures but government failure. ... The credit crunch and foreclosure problems are failures of government policy. Walter Edward Williams, American economist, commentator, and academic

Market overview

When Evergrande announced that it was dealing with the possibility of bankruptcy, the markets had a prompt reaction. While the Chinese real-estate giant is still in limbo, the leading stock indices recovered in the last trading sessions, underlining that bad news from China may not automatically translate into negative returns for the US markets.

Jobless claims climbed slightly last week to 351,000 but are still near pandemic lows. Consumers’ confidence is slowly building up, thereby bringing support to the stock market. Moreover, the Federal Reserve announced that it would move slowly into “tapering” and reducing the available financial stimulus incited into the market since the beginning of the pandemic. The central bank underlined that the process would be gradual and that interest rates should most likely increase in 2022.

Focus:

Novavax

While Moderna, Pfizer and Johnson&Johnson are sharing the growing global market of anti-coronavirus jabs, new players are coveting the rampant profits stemming from the perspective of mandatory periodic vaccines. After falling behind in the race for authorisation in the United States and Europe, Novavax Inc and its partner Serum Institute of India have applied to the World Health Organization for an emergency use listing of Novavax's COVID-19 vaccine. The company aims to provide equitable access to COVID-19 vaccines for low- and middle-income countries, including India, the Philippines and Indonesia.

New players will have a rough time with high-income countries because most of their population is vaxxed, and the possibility of testing new solutions is limited. Thus, the only option for the latecomers is to address the markets with lower vaccination rates. But in such areas, the profits are limited.

Focus:

Canopy

It is not a secret that medicinal and recreational cannabis gained significant traction through the pandemic. Nevertheless, with the reopening of society and back-to-office policies in most corporations, many cannabis producers and suppliers face challenges in boosting their sales. While many of these companies are based in Canada, the US is a crucial market. The industry is waiting for a law legalising banks doing business with cannabis companies. Moreover, there are rumours about legalising cannabis at the Federal level. However, the likelihood of these rumours becoming a reality faded since the beginning of the year.

A company that fits the profile mentioned above is Canopy Growth, headquartered in Smiths Falls, Canada. Canopy has a portfolio of brands that include Tweed, Spectrum Therapeutics, and CraftGrow. While operating mainly in Canada, Canopy has distribution and production licenses in more than a dozen countries. They also have an option on the table to acquire Acreage Holdings upon U.S. federal cannabis legalisation.

Cryptocurrencies:

Bitcoin

Beijing’s crackdown on cryptocurrencies is a neverending story. After banning cryptocurrencies mining, Chinese authorities take an additional step in severing all types of crypto-related activities. Last week, China’s central bank renewed its anti-Bitcoin speech, underlining that all digital currency activities are illegal and vowing to crack down on the market. The People’s Bank of China stressed that all services offering trading, order matching, token issuance and derivatives for virtual currencies should be strictly prohibited. Moreover, Chinese authorities aim to cut all ties with any foreign crypto activity offering products to Chinese clients. In addition, Beijing authorities indicated that “overseas virtual currency exchanges that use the internet to offer services to domestic residents are also considered illegal financial activity.

The effect upon Bitcoin’s price was significant but less pronounced compared to China’s winter crackdown. There is no doubt that Bitcoin traders have already priced in China’s crypto exit and the fact that Bitcoin mining should find other alternatives to cheap and subsidized Chinese electricity.

Market outlook

The Dow Jones Index ended the week positively, hovering 34,800 after plunging as low as 33,600. However, the foreseeable market pullback is putting investors in a risky spot.

Bitcoin’s price managed to find support amid negative news and ended the week above 42,000 USD. Nevertheless, China’s Bitcoin crackdown will put additional negative pressure on mineable cryptocurrencies.

It is only a matter of time until the power, gas, and coal bubble will impact oil prices. Thus, there are sound reasons to believe that Brent could climb towards 80 US.

The Gold ounce continues to surf below the 1,760 mark.  Nevertheless, if the Fed's announced bonds tapering is confirmed, the gold ounce could move back into the green.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.