News Roundup Week # 2: Wahed gets fined, Stagflation and Bitcoin!

In our latest review of some of the major financial stories from last week, we look at how the Dow fell 622 points amidst fears of a Russia-Ukraine invasion, why we are still early on Bitcoin and Wahed Invests $300,000 fine from the SEC.

1. Dow has its worst day of the year, falling 622 points amid Russia-Ukraine invasion fears

The VIX, which is commonly referred to as the stock market’s fear index, ended the week close to 30. I previously referenced a study [1] – that found, on average, the higher the VIX when you invest, the higher the average expected return over the next 500 day period. If we refer to the chart in the referenced study, we see that based on historical data, the highest return when the VIX is close to 30 comes from Energy and Industrial stocks with an average 500-day return of close to 40%.

VIX table from the study [1]

Russian Invasion of Ukraine will impact energy prices

The impact of a full-scale Russian invasion of Ukraine will be most profound on energy prices. 

The United States is in much better shape than Europe in this regard since it has become self-sufficient in energy over the past decade. By comparison, Europe is likely to be impacted to a greater extent because it is heavily dependent on Russia for natural gas. Russia is the second-largest producer of gas globally, accounting for nearly 17% of the supply in 2020. 

More than half of Germany’s natural gas is supplied by Russia. [2]

Which means higher prices that will spill over everywhere

Historically speaking when you have a combination of inflation and interest-rate hikes, which is what we are expecting in the U.S. this year, this leads to stagflation (which is a word that comes from combining the words “stagnation” and “inflation”).

So it’s very likely that a period of rather choppy economic conditions awaits us.

We may enter bear market territory, which is a drop of 20% that lasts at least two months, however historically speaking, the average bear market lasts around 9 months.

The second headline from this week which has not been in the mainstream news but is high on my radar is:

2. We’re still early on Bitcoin

The fundamental value of Bitcoin is that it is a store of value. Therefore, at maturity, it should gain in price when the market is offloading risk, as it has been recently, and decrease in price when the market is onboarding risk, similar to gold. 

Gold is considered a safe asset. When panic enters the market gold prices go up, and when people start taking risks gold prices go down.

Why does bitcoin drop when markets drop and rise when markets rise?

This suggests that the money in Bitcoin is still, to a large extent, speculative money. This means Bitcoin. It has yet to mature as an asset class and fill its role as a store of wealth. 

Translation: We’re still early.

[3]

Once Bitcoin starts to move opposite to the market like gold does, then you’ve missed the boat, Bitcoin has matured and you’re no longer early.

Not investment advice, do your due own diligence.

The last headline in this week’s news is:

3. Wahed Invest got fined 300K by the SEC for misleading statements

The SEC says that from September 2018 to July 2019 Wahed allegedly promised investors that it would periodically rebalance their advisory accounts but did not do so at the time. During that period, Wahed allegedly advertised its proprietary funds when no such funds existed, according to the SEC. 

In July 2019, Wahed launched an ETF that sought to replicate the return, less the fees, of the FTSE USA Shariah Index maintained by FTSE Russell, the SEC says. 

According to the SEC, at the time, Wahed’s robo-advisory clients’ accounts were allocated to equities, gold, Sukuk (Islamic bonds), and cash, aligned to clients’ risk tolerance and investment goals. To help provide the initial equity capital for the Wahed ETF, the firm allegedly exercised its discretion to sell its robo-advisory clients out of individual equity positions amounting to more than $13 million in the days before the Wahed ETF launch.

The commission also says the firm failed to properly disclose potential conflicts of interest related to the Wahed ETF to its robo-advisory clients and that Wahed did not adopt and implement written policies and procedures addressing how it would assure Shariah compliance about clients’ investments on an ongoing basis. [4]

The last time I reviewed the individual holdings of Wahed’s portfolio from a comfort level and compared them to the comfort levels that PIF had given to the same stocks, Wahed came in last place compared to the other two funds I was analyzing.[5]

That said, I like to look at things from a systemic perspective. Wahed messed up but that does not make the company bad. What happened, happened in the past and it may be that now they are much better. Since the fine likely motivated a lot of material changes in the way they operate.

Internal sharia boards and paid sharia advisors, while good for marketing, offer very little regulatory value. It does not make sense for the party being regulated to be able to fire the regulator. In such an arrangement, you can be sure that very little substantive regulation is happening.

It led to a disaster in the bond rating space wherein bonds are rated by agencies that are paid by the bond issuers and contributed to the credit collapse of 2008. If this issue is not addressed in the Islamic finance industry it will lead to more serious problems down the line.

Sources:

[1]https://www.thestreet.com/etffocus/blog/why-the-vix-says-this-is-the-time-to-buy-not-sell

[2]https://www.youtube.com/watch?v=bKbLP4ZYiP4

[3]https://decrypt.co/90154/bitcoins-correlation-with-sp-500-nasdaq-hits-highest-level-since-july-2020

[4]https://www.barrons.com/advisor/articles/sec-wahed-invest-halal-robo-advisor-51644612178#:~:text=The%20Securities%20and%20Exchange%20Commission,to%20its%20Shariah%20advisory%20business.

[5]https://www.youtube.com/watch?v=w4NOR0p6cOc

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