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Found in space: how markets could make contact with reality in 2021

This month, Fiorino looks to the stars for an alien-eye view of Earthly financial conditions...

In his award-winning 1985 science fiction novel ‘Contact’, the late Carl Sagan imagined the first communications between technologically superior alien beings and the human race. Notably, the aliens opted to hook-up with humans in messages coded in complex mathematics (involving pi) rather than via social media platforms.

After some to-and-fro, the inter-stellar intelligent creatures in Contact conclude of Earthlings: “You're an interesting species. An interesting mix. You're capable of such beautiful dreams, and such horrible nightmares.”

But what would the same aliens, headquartered in the vicinity of the Vega star system some 26 light-years from Earth, make of our planet on a return visit in January 2021? We suspect the outer-space entities would – despite their long-distance objective viewpoint – still struggle to square-the-circle of human affairs as they survey the economic state-of-play in these tumultuous times.

Excerpts from the report may go something like this...

‘Earth 2021 as seen from Vega: an intergalactic interpretation’

Inflation risks to rise with recovery

Despite our repeated warnings, humans are now dealing with the economic consequences of a global pandemic. After some early confusion, most fiscal and monetary authorities are now following universal best practice in underwriting a recovery with all tools at their disposal. As per experiences in galaxies far, far away, the emergency-level responses are unlikely to spark inflation in the near term.

However, as the quickly developed coronavirus vaccines (thanks, of course, to the uncredited Vegan contribution to the Earth-based scientific efforts) build what humans weirdly call ‘herd immunity’, the also-strange ‘lockdowns’ will end, triggering a rapid economic upturn. If the easy money continues to flow into the recovery phase, reflation is likely.

We observe that the Covid-19 crisis has accelerated other on-planet trends including the march of digital technology and market consolidation.

Bank debt doubts in mixed-up markets

But, as usual, Earth financial markets are flashing puzzling signals. To take just one example, European financial sector equities remain deeply unpopular while the almost-equally risky subordinated bank debt securities in the Eurozone are much-loved by credit investors. While displaying poor revenue momentum, European financials are cheap based on both price-to-earnings and price-to-book-value metrics. An old saying circulating among market traders, however, has it that ‘European banks always look cheap’: Earth sources describe this as a ‘joke’, but you probably had to be there. We present some graphic evidence to the point...

Figure 1.  EURO STOXX Banks Price EUR, January 20- January 21

Source: Bloomberg, as at January 2021.

Figure 2. Total Return COCO Index, yearly since inception (%)

Source: Bank of America, Bloomberg as of 12 January 2021.

The data – unfortunately limited to only two dimensions unlike the Vegan minimal standard of 17 – shows US banks, like their European counterparts, are facing some tough fundamental conditions including lower rates, a flatter yield curve (albeit with a slight upward tilt of late) and high costs. Our analysis suggests current valuations may be (already) discounting the headwinds on the fundamental side for US financials: price-to-book-value figures foreshadow lower returns and the sector trades about 40% below the 10-year average compared to the wider market.

Figure 3. US banks’ performance (KBW Bank Index)

Source: Bloomberg, as at January 2021.

Universe in shock as oil price turns negative

In April 2020 Vegan monitors picked up a previously unheard-of signal in Earth commodity markets as US oil prices lurched into negative territory. After checking our equipment for faults, the analysts indeed confirmed that the price of a barrel of West Texas Intermediate (WTI) – the benchmark for US oil – fell as low as minus $37.63 a barrel on April 21, 2020. Essentially, buyers were being paid to receive oil – a situation almost as inconceivable as reverse time-travel. The US Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) later published a report to explain the root cause of the negative oil price incident: despite a multi-dimensional analysis, Vegan experts on human regulatory linguistics have yet to extract any meaning from the SEC/CFTC study.

Planet-care policies finally on mainstream agenda

In keeping with our previous Earth observation exercises (beginning 1985), we have updated information on the state-of-the-planet debate among its inhabitants. Pleasingly, our latest readings – despite, or perhaps because of, the pandemic backdrop – suggest humans are at last engaged in a more realistic, and urgent, response to the broader climate change issues threatening their very existence. Even since our most recent visit (2008), we note a growing realisation that human survival depends on a pan-planet philosophical pivot as detailed by the late German-British economist Ernst F Schumacher. We still find puzzling that 7.5bn Earth inhabitants “will absorb more mineral resources than 108bn humans who have walked the Earth to date”.1

Intellect with interest

“Wisdom demands a new orientation of science and technology toward the organic, the gentle, the elegant and beautiful.”

E.F. Schumacher, economist and statistician

Bitcoin currency conundrum continues (but the future is stable)

On another note, the Earthling notion of currency appears to have been distorted by the vortex created by the 2020 disturbance. In particular, the phenomenon known as bitcoin (first flagged in our earlier mission) is still classed as a ‘currency’ in most earth-based publications. Clearly, everywhere else in the universe any currency must be stable, which rules out bitcoin.

Despite the bitcoin aberration, the underlying blockchain technology – as developed on Vega – could feature in some Earth currencies soon. In January 2021, for example, the US Office of the Comptroller of the Currency laid out guidelines that would allow banks in the country to facilitate payments using ‘stable-coins’ built on blockchain networks. We recommend Vegan stable-coin currency specialists join the next Earth contact mission in an advisory role.

 

Stay tuned for future instalments of Fiorino, where we’ll delve into some of these topics in further detail. We think fundamentals will matter again, even in an environment where official intervention is in the driving seat.

Risk profile
  • The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
  1. 1Source: Guillame Pitron, The Rare Metals War: The Dark Side of Clean Energy and Digital Technologies 2020.

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