52 seconds capital

Month: January 2024

What’s in a name?

Shakespeare used this line in a play to suggest that a name is irrelevant.

(His justification: that which we call a rose by any other name would smell just as sweet!)

Many centuries on, today the author of the play still casts a long shadow over the central character who relays these words.

‘What’s in a name?’ is Juliet’s line; when she is telling the people of Rome that a name is nothing but a name. There is no meaning to it. Ms. Capulet tells her country she loves the person, and not the name ‘Montague’ itself.

But alas, we know how it unraveled as the star-crossed lovers hurtled towards their doom. The names mattered eventually.

Indeed, it was the only thing that mattered.

Ok, so what does this have to do with a post on finance?

Well, as in everything else in life, naming conventions matter in the world of finance.

And with the spotlight back on Cryptos this month, it may be a good idea for the regulators to look at one specific name there: Stablecoins (SC).

It’s been roughly a decade since the launch of BitUSD, the first ‘SC’.

What was this ‘SC’ backed by? Fiat? Commodities?

No, instead it was backed by cryptos (issued on the BitShares Blockchain).

BitUSD lost parity with the USD since then and hasn’t recovered.

Surely, you ask the question: What’s stable about ‘stablecoin’?

You would have thought that BitUSD breaking its peg and experiencing a price crush should have been the end of it.

Unfortunately, no.

Stablecoins had a fresh lease of life with the rapid ascent of Tether.to, Paxos, Circle, who repaired the dented credibility of BitUSD with a ‘currency board’ kind of an arrangement.

With a marketcap of $133 billion today, SCs have become systemically important.

And yet this expansive, credible-sounding asset class remains unregulated. (The US is yet to pass federal crypto regulation; UK has expanded the regulatory remits of Banks, to include SCs)

There is another puzzling aspect to the ‘Stablecoin’ that’s not yet been deciphered.

Why have regulators permitted the pvt sector to issue SCs? And what purpose is served by private sectors issuing SCs? (Most crypto exchanges today including Coinbase, Kraken and Binance permit conversion to and from Crypto to Fiat. This could admittedly have been a use case in 2014 but not today)

What utility could a SC possibly have when Central Banks (CB) issue Central Bank Digital Currencies (CBDC) to the public?

It’s common for us to think of the money held in our bank accounts as Cash, but it’s not: instead, its liabilities of the bank where we hold our accounts.

Again, if you are holding a wad of cash in your hand, that cash is not the liability of any commercial bank but of the CB. The currency note is CB’s legal tender.

What’s the fundamental premise of a CBDC?

That it would make digital cash available to the public.

What utility could a SC possibly have then?

Call it by any other name and it would be just as ‘Stable’?

Really?

By

Avinash Menon, CFA

Founder and CEO,

52 Seconds Capital Limited

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Mainstream media is calling it ─ the projected seismic shift in spending from fossil to renewables ─ the greatest reallocation of capital in the history of mankind.

Is there a headline number to this G.O.A.T capital reallocation?

Yes, indeed. And it’s staggering.

To achieve net-zero emissions by 2050, the estimated annual average (source: McKinsey & Company, 2021) spending on physical assets is $9.2 trillion. Aggregate that annual average spend until 2050 and you have a staggering amount of $275 trillion.

Now when you see a figure like that, as a Portfolio Manager, you are hard-wired to think: Follow that staggering dollar trail. This appears to be a long-term trend straight into the orbit. What’s my allocation weight to ‘Renewables’ going to be?

And yet, I admit this is the one question that I have dreaded facing from any client over the last couple of years:

How about we open an allocation to Renewables? (and that other elephant in the room now, after the SEC’s ETF grants: Bitcoin. But that’s a story for another day!)

The space hasn’t done too badly.

The S&P Global Clean Energy Index has returned a 10-year annualized USD total return of 5.17% (no doubt aided by the eye-popping 142% return in 2020)

The allocation question occasionally sees us (the client and me) meander in the direction of a ‘nibbling weight’. And that ‘nibbling weight’ is the truth that sets us free!

All portfolio managers routinely use nibbling weights to drop anchor on a security/sector.

And why do you use a nibbling weight?

For an obvious reason. The PM has little or no idea about the underlying security and is biding time for his or her ‘information coefficient’ related to this security/sector to expand.

Thats precisely the problem with Renewables now.

There is very little information coefficient to it, with investors in renewables stymied by a combination of muddle-through governmental policies (the EU considering import tariffs of Chinese EVs) and a mainstream media that often obfuscates facts.

So while the spotlight is on the US (on the back of the IRA) and on the EU (for stepping up the tempo on Solar, Onshore and Offshore Wind), the biggest actor on the renewables stage remains China.

Here’s why:

1. The Clean Energy Index spell this out in clear terms: Chinese firms make up 31% of the index constituents, with a total market cap of $267 bio (Vs. 17% of the constituents and a total market cap of $85 bio by US).

2. The IEA projects annual global wind energy capacity additions to increase from 75 GW in 2022 to 350 GW in 2030. China alone contributed 37 GW of that 75 GW targeted increment.

3. The story is no different when it comes to Solar Energy. China now controls 90% of the world’s polysilicon capacity.

4. There is an estimated 100+ pure-play EV manufacturers in China.

So there.

Its China with its chokehold on the renewables supply chain that will decide the narrative ─ and the portfolio weights ─ from hereon.

By

Avinash Menon, CFA

Founder and CEO,

52 Seconds Capital Limited

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The story goes like this:

IA tax advisor was narrating the Cinderella story to his little daughter. The girl listened with rapt attention as her dad droned on. Past the evil stepmother, the horrid stepsisters, the cinders and overall misery of Cinderella’s existence. The girl, who usually assailed her dad with a barrage of questions, stayed quiet all through this. And then there was a twist in the story. The little girl’s interest was piqued. It was that moment when the pumpkin turns into a golden carriage. The dad knew a kiddie question was coming his way. The kind he thought he could swat away. But he was stumped by what came next.

The girl asked, “Daddy, when the pumpkin turned into a golden carriage would that be classified as income or a long-term capital gain?”

This piece of fiction aside, taxation is clearly not terra firma; it’s at best a quagmire.

Soft and shapeshifting. To be treaded upon cautiously.

Of all the places on the planet, taxation could take an interesting turn in the EU this year.

It’s been 15 months now since the European Union announced Windfall Taxes on fossil fuel companies. The rollout appeared hasty. The implementation, chaotic.

In Sep 2022, in the aftermath of the Russia-Ukraine war and the resulting super-spikes in energy and electricity prices, the EU agreed on a temporary tax on fossil fuel companies, applied on profits exceeding 20% of a firm’s average profits over the previous four years.

I referred to taxation as a shapeshifting quagmire earlier on. And for good reason. There are many other references to taxation such as levy, surcharge, cess, and duty.

The ones that an investor into energy assets in the EU must be wary off in the current context are ‘tax’ and ‘levy’.

Why?

Because a ‘Windfall Tax’ doesn’t start out as a ‘Tax’, it starts out instead as a Levy ─ a temporary measure to raise revenues, usually in response to a crisis.

A Windfall Tax is undoubtedly populist and is music to a taxpayer’s ears, but it appears that the EU has unwittingly let the genie out of the bottle.

How do you roll back something this populist?

Not surprisingly, many countries from the EU (Czech, Hungary, Slovakia, Spain) now plan to extend the application beyond the original phaseout timeline of Dec 31, 2023.

While these Windfall Taxes took straight aim at the Energy and Electricity Producers, some countries within the EU brought in a few more industries within the scope of these taxes (Italy sandbagged the banking sector with its Aug 2023 announcement of a 40% levy; Portugal targeted food distribution).

The EU had projected a €140 bio largesse from these taxes in Sep 2022, but the initiative has only yielded a fraction ─ levies on surplus revenue earned by fossil fuel companies in the EU have generated only €17.5 bio (source: Law360 UK).

Its early days in 2024 but with energy and electricity prices having cratered from their 2022 peaks (see pic), are there any windfall gains left to be taxed?

By

Avinash Menon, CFA

Founder and CEO,

52 Seconds Capital Limited

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