Month: February 2021

Dear Ladies and Gentlemen

Concerns about monetary tightening in the wake of rising inflation pushed the interest rate on ten-year U.S. government bonds above 1.5 per cent yesterday.

Rise in Yields

A significant rise in yields on the U.S. bond market led to the highest level in the U.S. government bond market yields since February 2020. The prospect of further rising interest rates in the USA makes investments in U.S. dollars more attractive while at the same time, higher interest rates weigh on equity and precious metals investments.

Risk-Off

Any steep increase in government bond yields usually leads to risk-off behaviour. This is precisely what we saw yesterday.

Why Do Inflation Fears Impact Stock Markets?

Why do inflation fears impact stock markets, and why does the stock market react to rising yields with a nervous movement? The reason why inflation fears weigh on the stock market and impact stock markets mostly negatively lies in the fact that any rise in yields usually leads to a lower discounted value of future profits. However, if inflation rises, the effect may be offset at least to some extent on the corporate level by higher future sales and profits but only if such rising inflation can be passed on to customers, and only as long and up to the point where consumers are willing and able to pay the higher prices.

Strong Balance Sheets

Stock markets react to rising yields in varying degrees because some economic sectors are negatively impacted, while others benefit from rising yields. «Losers» may be found, for example, in the real estate and utility sector and quite in general in stocks of companies operating with a high proportion of debt capital that will become more expensive in the future. Usually, growth stocks are also likely to face headwinds, as we have seen over the last few weeks, depending, of course, on their business model. In the case of growth stocks, a more substantial differentiation between companies with strong balance sheets versus cash-burning companies has already started.

Bye, Bye, Equities?

I do not think that the U.S. government yields will rise and rise and rise. This would be a significant blow to the U.S. economy and most probably lead to a yield curve control by the U.S. Federal Reserve System. Therefore, I do not think that we have to say goodby to equities just yet. However, the shift from growth to value may continue and take some of the steam out of stock markets which may be nothing more than a healthy corrective reaction to recent exuberant increases.

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.

Many thanks, indeed!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

My partner Mark J. Valek coined the term volatility harvesting, and after my last weekly on cryptocurrencies, I would like to offer to you, Mark’s view on how to take advantage of a highly volatile asset class and explain what is behind «volatility harvesting». Mark is head of digital assets at Incrementum AG.

Volatility

In finance, the term volatility is commonly used synonymously for the risk of an investment. The website of Investopedia describes the widely used concept as followed: “Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.” Needless to say, a crucial dimension of successful portfolio management is how gravely the investment returns fluctuate over the years. However, when it comes to individual positions within a portfolio, there is no need to fear volatility. Leaving regulatory aspects aside for a second, a single investment conceptionally cannot be too volatile to be added to any given portfolio what is crucial though is the correct position size. A minimal allocation of a highly volatile asset can reduce the portfolio’s overall volatility due to diversification effects. This fact is well established since Professor Harry Markowitz was awarded the Nobel prize for his Modern Portfolio Theory, which explains this.

Volatility Harvesting

However, highly volatile assets may be able to offer more than ‘just’ diversification effects. Their volatility can be your portfolio managers ally to increase the portfolio’s returns. This can be the case if one applies a disciplined investment strategy. We call this strategy #VolHarvesting.

Step One: Rebalancing Bonus

There are two steps regarding the implementation of our #VolHarvesting strategy. The first step is via a disciplined, rebalancing approach. During the portfolio manager’s rebalancing, the portfolio manager reduces assets that have increased in portfolio size due to their outperformance versus underperforming assets. With the proceeds, he increases the positions of the underweighted assets. This process ensures that he buys low and sells high. If this approach is applied in a disciplined manner, the investor profits from the so called ‘rebalancing bonus’. This strategy works exceptionally well if the assets that are being rebalanced exhibit high volatility and do not correlate positively.

Step Two: Selling Options

The second step of our #VolHarvesting strategy is somewhat more sophisticated. It involves the implementation of options. In the options market, one can go long and short options. Going short options is usually associated with many risks, as one sells insurance to one’s counterpart. By selling a call option, one takes on the obligation to sell an underlying asset at a specific price at a specific time in the future, regardless of what the spot price may be at that time. However, if an investor holds the underlying of the option as part of his or her portfolio, this risk is minimal, as one can sell the underlying if the call option is exercised. This strategy is called covered call writing.

Combining the two

Now let us combine the first step of our #Volharvesting strategy with the second step. If our portfolio is overweight, some assets and a rebalancing will make sense, we can sell some covered call options basically with no risk, as we are planning to reduce our asset anyway. As a seller of an option, we receive a premium. Moreover, this premium is very rich if the underlying asset is highly volatile.

We have been applying the #VolHarvesting in a fund that invests partly in cryptocurrencies and can add double-digit returns due to disciplined harvesting of the volatility. The fund was up over 80% in 2020 and so far this year is up another 15%.

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.

Many thanks, indeed!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

As many of you will know, my partners and I live the privilege of reading books, research, articles, newspapers, and magazines to build up our knowledge base continuously as part of our job.

We receive much research for free, but we also buy research from external sources and one product we buy comes from a German house and frankly speaking, I am very fond of it. These guys just published an article on Bitcoin, and today I would like to share with you one or the other of their paragraphs with some of my comments. Please be aware that this is neither a recommendation to buy cryptocurrencies nor a recommendation to sell cryptocurrencies. It is merely an informative piece of text about a possible price development of Bitcoin and other cryptocurrencies in my weekly email format, which I hope you may appreciate. Please enjoy the read:

USD 100’000

If Bitcoin reaches the USD 100’000 mark soon, then the Bitcoin law of measuring through the power of 10 would have been enforced once again within a few months. As you may know, Bitcoin was trading below USD 10’000 at the end of July 2020 and is currently trading close to USD 50’000. The runs from USD 1 to USD 10, USD 10 to USD 100, USD 100 to USD 1’000 and USD 1’000 to USD 10’000 all took place within weeks or months. Between those runs, there was a break every time. The last two breaks lasted roughly three years each. If this rule (of 10) continues, the target does not have to be USD 100’000 exactly. The price may over-or undershoot slightly and yet, looking at past price patterns, one can detect some regularity.

The exciting part of the research article on Bitcoin I am partially quoting here is what may happen over the months and years to come if Bitcoin or other cryptocurrencies continue to shoot through the roof. The analyst who produced the article has an interesting take on it.

The Role of the Central Banks

If Bitcoin and other cryptocurrencies continue to perform well, we could eventually find ourselves in a situation of a significant «crash». The main reason behind such a crash could be explained by central banks’ increasing perception of cryptocurrencies as serious competition for their own currencies. Central banks could be afraid of losing control over their monetary system. Such concerns may be fuelled even more by Tesla’s recent bitcoin purchase. The higher Bitcoin and the cryptocurrencies rise, the more likely they become victims of their success. It seems only natural that the more cryptocurrencies rise, the more central banks will want to regulate them.

Christine Lagarde

Last month Christine Lagarde expressed her views concisely regarding the regulation of cryptocurrencies. In her opinion, the regulation would have to take place within the global cooperation framework (at the G7 level, extended to the G20). The FATF (fatf-gafi.org) is an international institution against money laundering and could play a role in this. However, the fight against dubious business and money laundering connected with cryptocurrencies would probably do little to harm Bitcoin and co. Another remedy could be to ban Bitcoin mining. But I think it is difficult to imagine to get governments of lesser regulated nations to cut off the electricity of mining farms belonging at least partially to their own government members. It is straightforward, as long as there is a business to be made, there will be.

Restrictions

A sharper sword would be payment bans, capital export controls, exchange and trading restrictions. The Fed and ECB could ban Bitcoin and other cryptos as a payment method in the USD and EUR area. This could, for example, happen after having introduced their own digital money; Central Bank Digital Currency (CBDC). Central banks could also eliminate the store of value factor by setting upper limits for transfers. For example, only EUR/USD 10’000 per year and person would be transferable from crypto exchange accounts to current bank accounts. Restrictions could also be imposed on crypto exchanges. The mere build-up of a threat by G7 countries and major central banks (Fed, ECB, BoJ, POBC) alone could already hurt cryptocurrencies significantly. Cryptocurrency prices would fall because private investors could become more cautious. Why should average investors take the risk of violating money-laundering laws? Eventually, the processes described could be set in motion. Possibly initially only with increased verbal warnings by central banks and governments. Investors have been warned previously and on several occasions by central banks that their cryptocurrency investments could fall to zero.

Feasible Scenario

To me, this seems much like a bouquet of options for a feasible scenario, and to you?

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li.

Many thanks, indeed!

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

I receive a fair amount of messages from readers puzzled by the performance of equities markets. The arguments are similar, high valuation, Covid-19 crisis not priced in yet, general public suffering from lockdowns, etc. While I understand the arguments, the reality is much more about perception. Let me elaborate quickly:

Financial Markets

Financial Markets do not necessarily move based on what analysts regard as being fairly priced but are mainly driven by supply and demand. If billions of multiple currencies are pumped in financial systems locked into a zero- or negative interest “investment-prison”, investments will seek the seemingly best return for the seemingly lowest risk. However, the seemingly best return for the seemingly lowest risk always remains a question of perception, and that perception may change.

Perception; Definition by Cambridge Dictionary

According to the definition by Cambridge Dictionary, the word “perception” means: “belief or opinion, often held by many people and based on how things seem“.

The critical words in this definition are “belief”, “opinion” and “seem”. Perception is not necessarily about reality; it is about what seems to be the reality; it is about opinion and belief.

The market is always right

“The market is always right” is one of the first things a young investor will learn from older investors. There are thousands of quotes defending but also renouncing to this theory.

I often get the impression that some market participants underestimate the power of perception by large investment cohorts and at the same time are overestimating their own investment knowhow. Investing sometimes also means going with the flow, the so-called market momentum. However, if this means investing against one’s principles, Ladies and Gentlemen, I would always recommend taking money off the table. Gorden Gekko’s “greed is good” is probably not the right strategy for everyone. Investing has to feel right; otherwise, it will very quickly become a rather stressful exercise.

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Many thanks, indeed!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li