14th December 2024

1. Asset Managers Reduce Short Dollar Positions

• Resilient US economy and geopolitical tensions are making asset managers reconsider their expectations for a weaker dollar.
• Institutional investors have significantly reduced their net dollar short positions, reaching the lowest level since 2017.
• Hedge funds have increased their bullish bets on the dollar.
• The dollar has strengthened by about 5% since late September due to higher US inflation and geopolitical risks.
• Fed officials are cautious about further rate cuts, which supports the dollar.
• Geopolitical turmoil in Syria, South Korea, and France is boosting demand for the dollar as a safe haven.
• Asset managers are least bearish on the dollar since 2017, while hedge funds and asset managers are split on the euro.

2. Argentina's Stable(-ish) Currency

• In his first year, President Javier Milei has managed to stabilise Argentina's economy, significantly reducing inflation from 26% to 2.7% and strengthening the peso against the black market dollar (known as the "blue dollar".
• His aggressive spending cuts and deregulation measures have led to a primary fiscal surplus each month. However, despite these economic improvements, high poverty rates and low living standards remain significant challenges.
• The peso's stability has been maintained through controlled devaluation and a tax amnesty that brought hidden dollars into the financial system.
• Milei's ability to sustain these gains and address underlying economic issues will be crucial for long-term growth.

3. MicroStrategy's Mega Bitcoin Gamble

MicroStrategy is a software vendor that has become one of the major holders of Bitcoin - the company has basically pivoted from just?selling software to mostly buying BTC. Michael Saylor, the company's Executive Chairman (he was the CEO between 1989 to 2022), is a Bitcoin maximalist and holds a sort of messiah status among crypto-bros.?

MicroStrategy's not-insignificant shift in strategy came about in 2020, and the company currently owns more than 2% of the market. Tthe company has been aggressively buying Bitcoin and funding these purchases through the issuance of convertible bonds. These bonds are attractive to investors because they offer the potential to convert into shares at a pre-determined price, benefiting from the high volatility of MicroStrategy's stock.?

The company's strategy involves borrowing money at zero interest rates through these convertible bonds, purchasing Bitcoin, and then paying off the debt when the stock price rises. This approach has created a self-reinforcing cycle: the more bitcoin MicroStrategy buys, the more volatile its stock becomes, which in turn allows the company to issue more favourable bonds to buy even more bitcoin. It also sounds like a massive house of cards that could fold in on itself, right?

MicroStrategy's success story is driven by its stock's volatility rather than a pure play on its Bitcoin holdings. The company has issued multiple convertible bonds with favourable terms, leveraging its stock's high volatility to secure low-interest funding.

The volatility of MicroStrategy's stock, amplified by its bitcoin holdings, enhances the value of the embedded call option in the bonds, allowing the company to borrow at lower rates.?

4. Who's Getting Hacked?

• Apparently, the rapid installation of rooftop solar panels is creating significant vulnerabilities in Europe's power grid.?
• A cybersecurity consultant recently demonstrated how he could bypass firewalls and control solar panels using just a laptop and smartphone, posing a serious risk to the grid's stability.?
• The exponential growth of these systems means millions of new connection points, increasing the potential for cyberattacks.
• Utilities and governments are increasingly concerned as the number of cyberattacks on energy infrastructure rises.?
• NATO and the EU have conducted security drills and implemented new laws to bolster defenses, but the rapid expansion of solar technology outpaces these efforts.?
• The EU's new rules for solar device protection will take up to 18 months to be fully implemented.
• The threat is not just theoretical; real incidents have occurred, such as hackers using solar monitors in Japan to steal from bank accounts.?

Harry Mills | Director, Oku Markets

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