Hive Intelligence Report: Renewable Energy, UK Rates, and Crypto ETFs

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil all the latest insights from our conversations up to 18 October. These are views from our network rather than the views of the Macro Hive research team.

Energy Crisis 

European Energy 

• Putin noted that renewable energy sources are ‘notorious for erratic power generation. It requires large reserve capacities. In the event of major generation failures, primarily due to bad weather, this reserve is simply not large enough to cover the demand.’ 
• And, for those short-term bursts, nuclear is just a nice idea. It will run continuously, but just not on command. 

Are foreigners to blame for the gas crisis in Europe? 

• It’s tempting to blame foreigners for the gas crisis in Europe. 

• In a world of narrative led propaganda, pointing fingers is easy (as per the article), the damage done to European power markets from German greens to the rapid halt of coal all speaks of reactionary politics. 
• Much like the present clamour for green commitments will shackle western governments into even more uncomfortable realities, other nations will retain high pollution energy security. 
• Nuclear is finally returning to the populist agenda in a meaningful way, which is great. But I can’t help but think that greater funding for fusion, U.K. fracking, or even clean coal, all needs to be part of the mix given the vast lead time in building nuclear. 
• The Green radicals are a huge agenda to our economic future. But ironically so is the alternative. The only difference is timeframe. 

Levelised Costs of Energy (LCOE) 

• The International Energy Agency released their World Energy Outlook, but it’s hard to trust their LCOE calculations.  

Market Sentiment

1. Inflation is a concern but very few expect stagflation. A plurality expects reflation.
2. Growth concerns are high, but COVID concerns are almost gone. The big binary tail risk going into year-end is US fiscal spending, which is small in probability but large in potential market impact.
3. China is slowing down and markets may have too big of a risk premium which could lead to a cyclical bounce. But the key question going forward is if it can avoid a hard landing, and if export-driven growth can offset the domestic slowdown.
4. Sentiment is bearish and positioning feels stretched. Probably too much so given how easy financial conditions are and may be a sign of an impending rotation out of US stocks and technology stocks to come.

Asia-Pac

China Growth

• Don’t be too bearish on China growth. Behind the scenes regulators have been working to stabilise the housing market.

New Zealand

• New Zealand CPI came in strong at 4.9% YoY vs 4.2% exp. This will firm up expectations for a hike at each of the next two meetings. There was already 47bps priced over next two meetings but that has now jumped to 58bps as there is some expectation of a 50bps move at one of the upcoming meetings.

Bank of England

• BoE Governor Bailey firmed up his view that the BoE will need to act to stem rising inflation when speaking over the weekend. Rising energy prices mean inflation ‘will last longer and it will of course get into the annual numbers for longer as a consequence,’ he said. ‘That raises for central banks the fear and concern of embedded expectations. That’s why we, at the Bank of England have signaled, and this is another signal, that we will have to act. But of course that action comes in our monetary policy meetings.’
• Market is currently pricing 8bps for November and 22bps for December. Market generally expect BoE to wait until December so that can see the impact on employment of the end of the furlough scheme in October. UK CPI due on Wednesday.

Commodities

Uranium

• More bullish news on uranium. The largest producer in the world invests in a new physical uranium investment fund.

Carbon Credits

• EU Commission avoids calls for intervention in the EU ETS Carbon Credit market, however, persists with tasking officials to investigate further causes of financial speculation. For me, expect curbs (limits) on market participation and by various market participants soon.
• And it makes total sense when your end goal is reduction of carbon pollution.

Crypto

Implications of Russia tolerating crypto

• Putin defended cryptocurrency amid a global regulation push. Putin is going after king dollar.
• All countries are looking for alternatives to the dollar and to get out from under US sanction control. You would think China wants the same, however I don’t see people adopting anything that the Chinese control like the Digital Currency Electronic Payment (DCEP). Their only chance is a decentralised crypto.
• Decentralisation is a real value. But there are a lot of bad things surrounding crypto as well, such as wealth inequality.

Implications of US approving crypto ETFs

• As soon as an ETF is up, the SEC and IRS will be in every orifice of crypto.
• It’s no doubt the IRS is going to want to get paid, and really it [crypto ETFs] should be no different than other trading products. Exchanges will be required to provide full 1099’s, get your SS etc., just like Fidelity and others do.
• The US needs tax revenue and they have a perfect opportunity with the mining industry migrating here from China. They are desperate to find ways to pay for all this spending.
• This is not a bad thing. The US is recognising this as a real industry which is here to stay, overall, its positive for the continued growth.

Crypto CFTC positioning by aggregated market participant

• Looking at CFTC data [below] it is not clear whether their investor category is capturing actual investors.
• This is because large bitcoin investors use futures to hedge rather than sell their BTC and must transfer into USDT, or similar. Most the ‘whales’ I know have their holding in cold storage and trade futures against it. So yes, they are investors, but they are far from short.
• If I was a bitcoin maximalist (I’m not) I would trust USDT less than I trusted FIAT. And you’re not going to shift major volume to any other dollar proxy easily.

A Conversation on Modern War

• Arguably war has taken a very different direction since the dawn of the web, whilst large scale conflict has by and large been replaced by propaganda, economic dominance, and a melange of low-tech high-collateral damage.
• Taking this into account – Chinese military action over Taiwan seems more remote due to the economic leverage of those beloved chip foundries.
• However, it’s remote because they have no military superiority. When they have it, dynamic will change. They face a two front war given India.
• Not sure about no military superiority. US soldiers passing through war carries more political pain than Chinese soldiers.
• For a real war, no. But for a lesser war, yes. Both political sides know this is not a war the USA can lose.
• I struggle to see ‘real’ wars in this modern epoch.
• But non-real wars keeping popping up. Korea. Vietnam. Middle East. Syria. Iraq. Afghanistan. And don’t forget Granada.
• For arms manufacturers the demand curve for conventional weapons is akin to the Cold War MAD period – weapons not used for fighting, just posturing. Although, doubtless US tank brigades will all be driving around seeking charging points.

Trades

• Long China Equity (Friday). A feeling that technology giants have been put straight and are now okay to resume business as usual. It’s also cheap.

Interesting Reads

• Crypto Crime Cartel: Tether using its stablecoin scam to exploit El Salvador
• A New Global Economic Consensus
• More on the Determinants of How the Perpetual Motion Machine Works

Humour

• Billionaire Star Trek

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)