Week 38: New Frontiers, Quad-Witching, Chinese Competition

Briefing:

• Quad-witching is impacting markets and Dec 17th is the next date to watch.
• Space and the Metaverse are the next frontiers for investors, creators, entrepreneurs and explorers.
• China will eventually need technology leadership, even if it doesn’t like its current cohort.

Quad witching

Financial markets are influenced by activity in the derivatives markets. Some active traders would go as far as saying that the derivatives market IS the market. For example, Reddit’s WSB forum encourages investors to buy out of the money call options on their favorite positions (TSLA or GME) so that market makers have to buy the stock as a hedge, which drives the price up further. This derivative activity creates a feedback loop that can send a stock price vertical.

Quad-witching is a quarterly calendar event when four categories of derivatives contracts expire on the same day: equity options, equity futures, index options and index futures. The last one was Friday, Sept 17th, when there was a dramatic market selloff. Many attributed the selloff to the Evergrande story, but that story was a week old by the time Friday came around.

Suppose the quad-witching will result in excess market activity due to a forced, momentary de-leveraging and re-leveraging. In that case, we will probably continue to see extreme prices on those days. The next quad-witching date is Friday, Dec 17th. Look for prices to drop in the days leading up to Dec 17th to test the theory. Market inefficiencies do exist, although not in perpetuity.

Investing In New Frontiers

What are the new frontiers in 2021? We have two answers to this question: Space and the Metaverse. For entrepreneurs and explorers, investing time and energy in these two areas is inspiring and likely to be lucrative.

Physical boundaries limit space. Today, space entrepreneurs focus on rockets, propulsion systems, satellite communications, cleaning up space debris, microgravity manufacturing, and many other categories that seem like real-life science fiction. Space investments are available in private and public markets. SPACs, in particular, offer compelling access to space companies.

The Metaverse allows for endless combinations of virtual ecosystems that can be configured, designed and explored. Science fiction writers have been writing about the metaverse topic for decades, first with Snow Crash (Neal Stephenson, 1992), who coined the term and recently with Ready Player One (Ernest Cline, 2011). I recommend both books. Cryptocurrencies are an example of a metaverse technology as they exist entirely online. The size and scope of cryptocurrencies (currently $2 trillion market cap with 12,000+ protocols) give you a sense of how we create new value online where there was previously nothing at all.

Metaverse investments are a bit more obscure. Semiconductor and software companies like NVidia create the hardware necessary to power the Metaverse. Unity (public) and Epic Games (private, but 40% owned by Tencent, which is public) are two Metaverse rendering companies that help design and control “physical” properties of the Metaverse. Even Toast, which IPO’d yesterday, could help bridge the restaurant payment systems into an online web of information and consumer profiles that resembles some form of Metaverse. Facebook has spent the last few years gearing up to be a leader in metaverse software. Apple will eventually supply AR glasses to view the Metaverse. The important thing here is that the Metaverse can expand indefinitely. There are no limitations on production or consumption within a virtual world.

Investing in Chinese companies

I’m looking forward to reading Jacob Helberg’s upcoming book, “The Wires of War: Technology and the Global Struggle for Power,” available on Oct 12th. Jacob Helberg is a senior advisor at the Stanford Center on Geopolitics and Technology and was formerly in charge of Google’s efforts to combat disinformation and foreign interference. As the title of the book hints, technology is the critical player in the next phase of global superpowers.

The Chinese Communist Party has demonstrated that it would like to maintain its grip over major tech forces like Alibaba, JD, Tencent, Ant Financial, and Jack Ma at all costs. The regulatory crackdown has cost hundreds of billions of dollars in lost market cap. This loss drives away global investors and reduces venture capital activity as entrepreneurs would prefer to test and innovate within free markets where they are not under the current and future thumb of the CCP. The US innovation market is now even more attractive by comparison.

Amid China’s tech regulatory crackdown, the Evergrande bankruptcy story has taken over the imagination of journalists. China’s Evergrande bankruptcy, as bad as it is, is not an existential threat because it is a problem that can be solved via bailout. Existential threats, like Covid or climate change, are not so simple and cannot be instantaneously solved with money. Existential threats deserve careful consideration. Fortunately, Evergrande presents a financial issue, not an existential issue.

Many investors are passionate about their stance on China. That ranges from “never-China” to “China’s future dominance is inevitable.” Presently it’s hard to think that the anti-Chinese market sentiment could get any worse. If ever there was a time to buy discounted Chinese tech companies, it would be now. Whether it’s this current technology cohort or a new crop of emergent players given the stamp of approval by the CCP remains to be seen.