July 11, 2023 | Peel #498

Silver banana goes to...

In this issue of the Peel:

• While China struggles with deflation and a slow recovery post-C-19, investors predict that China’s stimulus-driven reaction could keep the global economy afloat.
• In the market, Novavax and Cava Group are performing well, but FMC Corp and MercadoLibre are facing difficulties due to lowered revenue guidance and changes in cross-border commerce rules, respectively.
• DeFi might need TradFi (traditional finance), as approval for a spot BTC ETF from the SEC could boost institutional support for the asset class and significantly impact both traditional and decentralized finance markets.

Market Snapshot

Happy Tuesday, apes.

Not sure whose idea it was to start having full, 5-day workweeks again, but we better get used to it. The next market holiday isn’t until Labor Day (Sept 4th this year), so I hope we can get used to the 40 hours again.

Obviously, for most of you, 40hrs would be a dream, but for equity markets, they’re simply going back to their standard 32.5 hours of weekly trading. So far, it hasn’t been too bad.

Equities kicked off this non-holiday week with a mild gain despite mega-cap tech’s best efforts to burn everything to the ground. Each of the S&P’s top 6 names fell by at least 0.76% yesterday, which generally drags down the index as a whole, but gains focused on industrials and healthcare fought back and won.

Treasury yields, meanwhile, sold off as investors snatched up all those 2-year notes with a +5% yield. There wasn’t much news on the macro front this Monday, but the US Dollar joined yields in a light selloff to kickstart this wonderful week.

Let’s get into it.

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Banana Bits

• Turkey has finally decided to be boys with Sweden and allow them into the NATO gang
• The US is no longer #1 in the world in one of our favorite things ever…incarceration rates per capita
• Like building a train station or just about anything else, China is moving a lot faster than the rest of the world in AI regulations…whether for better or worse
• Microsoft decided it’s still going macro-hard in layoffs

Macro Monkey Says

China Check In

Three things you cannot teach: 1) Speed, 2) Stupid, and, of course, 3) Inflation.

The first two are obvious, but that third one may seem a little out of place, especially to the apes out there reading this in a Western country that now pay $9.50 for a carton of eggs.

But just ask China. This is a country experiencing the exact opposite problem as most Western nations in the post-C-19 days: there’s simply just not enough inflation.

Before we even get into it, why on Earth would a country want inflation? Do we want consumers to spend more money on goods and services than last year?

Well, in short—yes, actually, we do.

"... if you don’t have some inflation, then you eventually end up with deflation."

Nothing in economics is stable in the long term, especially “equilibrium” prices. Entropy is king in the macro environment, and as a result, if you don’t have some inflation, then you eventually end up with deflation.

Deflation is when prices actually fall from period to period (not to be confused with disinflation, which is just slowing inflation). Prices are actually falling in deflation.

And in a deflationary environment, economic activity just about stops; because why buy something today when it’ll be cheaper tomorrow?

Bang, now that that’s out of the way and we all have PhDs in aggregate economic pricing, let’s see what’s going on in China. Per the FT:

According to recent statistics from China’s National…Statistics…Bureau, their version of the CPI gained 0.0% annually and actually fell 0.2% on a monthly basis; no change in prices annually, and actual deflation registered on the monthly print.

This might seem impossible compared to the US, EU, and especially the UK, but it’s important to recall that the Red Dragon had a very different reaction to the C-19 outbreak than others.

While most major economies dumped cash on the problem and tried to continue as close to “business as usual” as possible, China’s “zero-C-19” policies essentially rested the economy on the heads of food delivery companies and ad hoc production for a few years.

Now, attempting to spur growth out of the yearslong, nationwide shutdown, China is experiencing one of the slowest recoveries of any major economy globally.

"... a domestic-driven economic slowdown really couldn’t come at a worse time."

With U.S. relations deteriorating and companies far and wide pivoting out of China and into competitors like Vietnam, Cambodia, and Mexico, a domestic-driven economic slowdown really couldn’t come at a worse time.

Now, you may be thinking this is bad news for the global economy as China, literally called “the World’s Factory,” looks a little downbad. But according to investors like Stan Druckenmiller, Chamath Palihapitiya, and others, a downbad China eventually leads to a stimulus-driven China.

If the Middle Kingdom truly does go full JPow-In-2020, their view is that this will be more than enough firepower to keep the global economy from falling into recessionary jaws.

We can’t really speculate on what to expect (like we should even be doing so in the first place), but given the stark differences between the Chinese and US-based economic systems, predicting the future here is like an astrology enthusiast using the stars to predict the score of the 2035 World Series. Just doesn’t seem worth it.

What's Ripe

Novavax (NVAX) ↑ 29.46% ↑

• Not sure if anyone on Earth has had this thing in their portfolio since we were bumping elbows and having those god-awful Zoom happy hours, but if you did, yesterday was your lucky day.
• Despite the C-19 vax being this company’s first “commercially viable” product EVER, somehow Novavax has stayed alive since its founding in the late ‘80s.
• Many had written it off as a zero already, but a $350mn lifeline from the Canadian government to purchase the firm’s unused C-19 vaccines rallied investors like King Leonidas in 300.

Cava Group (CAVA) ↑ 11.06% ↑

• Can it be? Are we back?? Based on Cava’s legitimate doubling from its $22/sh IPO price in just under a month of trading, this chain might be starting to rattle the cage of all the sidelined, would-be IPOs of late.
• Basically, the market has thus far made fools of the Cava execs and the bankers that worked with them to price shares at $22, with the +$40 open confirming shares could’ve been sold for higher.
• Any pre-IPO buyers can thank almost every analyst on the Street for that. Initiating coverage on the name, most banks have slapped a fat, green “Buy” on shares.
• Of course, name recognition matters in the post-IPO days as retail investors especially love to buy companies that they know or use. Doesn’t get much better in that regard than being a Chipotle-style restaurant that (after going for the first time this past weekend) I can confirm absolutely slaps.

What's Rotten

FMC Corp (FMC) ↓ 11.15% ↓

• If FMC stands for “f*ck my company,” then executives absolutely nailed it on Monday, sending shares into an absolute tailspin.
• Ohh, never mind. It turns out it stands for “Food Machinery Corporation…Corp.” Guess they did the opposite of nailing it, but that tends to happen when you trim revenue guidance by nearly 30%, as FMC did yesterday.
• This nightmarish announcement came Monday as FMC announced drastic reductions in inventories, implying that the firm’s suppliers aren’t confident that recent elevated demand trends can last. Wall Street, although caught off guard at first, clearly seems to agree.

MercadoLibre (MELI) ↓ 5.78% ↓

• We all love free markets, but despite this company’s name being the literal translation of that phrase, investors did not at all f*ck with this name on Monday.
• Shares in the Latin American Amazon that is MercadoLibre (meaning the e-commerce store, not the actual rainforest) were dumped on Monday thanks to a bunch of haters from Bank of America.
• Analysts at BofA chopped their outlook on the firm from Buy to Neutral, citing cross-border commerce rules out of Brazil as the primary detractor.
• Basically, transactions into Brazil will get slapped with a 17% VAT for orders over $50. That is not exactly ideal from the government of the country that makes up your largest market.

Thought Banana

DeFi Needs TradFi?

The Red Sox and Yankees, Michael Scott and Toby, and…BTC and the SEC—three things that absolutely hate each other.

Yet, arguably, without each other, none of them would have been as popular as they are now. That’s obvious for the first two, but now, that could soon become the case for digital assets and the Securities and Exchange Commission.

You’ve no doubt heard all about the attempts by Fidelity, BlackRock, and the like to begin offering a spot BTC ETF. So far, it’s been nothing but contagion between SEC Chair Gary Gensler and Satoshi’s BTC-fanboy disciples, but…

"We’ve been somewhat mildly flippant in our accounting of why the SEC has yet to approve a spot BTC ETF, but to give them some credit ..."

That could change very soon. We’ve been somewhat mildly flippant in our accounting of why the SEC has yet to approve a spot BTC ETF, but to give them some credit, the arguments are:

• BTC is traded in a decentralized manner, unlike BTC futures traded on regulated exchanges like the CME overseen by the CFTC
• Spot BTC is far less liquid than BTC futures
• When lost or stolen, you cannot replace BTC that is (was) rightfully yours
• The first gold ETF issued in the US was futures-based, not spot price

So, there’s good reason for the hesitance. After all, the SEC’s job is to protect investors…not give them as many chances to get rich as possible.

But, according to recent reporting from the WSJ, an approved spot BTC ETF could be the kicker the asset class needs to send the kingpin of DeFi back well above $30k sustainably.

At a basic level, the idea behind the thesis is simple: SEC’s approval of a spot BTC ETF is the surest sign of institutional support for this asset class to date. Needless to say, the flow of dollars from institutions into the asset class could be wild.

"ETFs do this through processes called redemption and creation (ask ChatGPT) ..."

On a more complicated note, that would legitimately mean that any company offering a spot ETF would have to hold X number of BTC to maintain the fund’s NAV.

ETFs do this through processes called redemption and creation (ask ChatGPT) that involve keeping on their books an ever-fluctuating quantity of the underlying asset at all times. Therefore, you would have to see huge purchase lots in spot BTC markets for names like BlackRock and Fidelity to achieve the scale they’d need.

That might be hard, considering how much of the BTC float has been mined and stored in hard wallets. Furthermore, most BTC maxis are more likely to part with their left arms than their BTC…meaning sellers may be scant.

It’s a tough problem, but I guess that’s why Gensler, Abby Johnson of Fidelity, and Larry Fink of BlackRock get the big bucks—except, maybe after this, they’ll be receiving the big BTCs.

The big question: Will the SEC approve a spot BTC ETF in the near future? If so, how does that distort both TradFi and DeFi markets from where they stand today?

Banana Brain Teaser

Yesterday — A man hijacks an airplane transporting both passengers and valuable cargo. After taking the cargo, the man demands two parachutes, puts one of them on, and jumps, leaving the other behind. Why did he want two parachutes?

If the officials thought he was jumping with a hostage, they would never risk giving him a faulty parachute.

Today — Insert one word in each pair to link the two words together. The end of the first word is the beginning of the second.

1. Digital __ __ __ __ __ __ Shy
2. Crystal __ __ __ __ Park
3. First __ __ __ __ __ Clown
4. Bed __ __ __ __ Candy

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“If there is one common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.” — Carmen Reinhart

Happy Investing,

Patrick & The Daily Peel Team

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