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Hypersonic missile test has intensified scrutiny of Beijing’s military buildup

A hypersonic missile test China carried out last summer involved a sophisticated maneuver in which a projectile was fired from the system during the flight, according to U.S. officials, in a sign that the Chinese program is more advanced than previously known.

The hypersonic test, which was earlier reported this fall, and the advanced capabilities of the Chinese missile, show the pace at which the Chinese are developing advanced weaponry that is outpacing American technology. U.S. officials have expressed concern that Beijing is moving faster than expected to build platforms that could target American ports or installations in the Indo-Pacific region.

The new details of the advanced capabilities of the hypersonic test were earlier reported Sunday by the Financial Times, which said the flight had occurred in July.

There was an additional test of a hypersonic missile in August. It wasn’t clear if the projectile that was fired during the July test was a missile or a decoy designed to confuse missile defenses.

Pentagon officials declined to comment on the hypersonic missile maneuver. But the new capability has intensified scrutiny of Beijing’s already sizable military buildup, U.S. officials said.

Hypersonic missiles fly at least five times the speed of sound and move closer to the Earth than intercontinental ballistic missiles making them extremely difficult for existing radar systems to detect.

In an interview with CBS News last week, Air Force Gen. John Hyten, who until last week was the vice chairman of the Joint Chiefs of Staff, provided the fullest public explanation yet of what the U.S. understanding is of the Chinese hypersonic missile test in August.

“They launched a long-range missile,” Gen. Hyten said during that interview. “It went around the world, dropped off a hypersonic glide vehicle that glided all the way back to China, that impacted a target in China.”

Officials have said the missile missed its target by more than 20 miles. Gen. Hyten said the missile came “close enough” to hitting its target.

Last month, while talking with reporters Gen. Hyten said that the U.S. had fallen behind in its development of hypersonic technology. In the past five years, the U.S. has conducted nine hypersonic tests while China has launched hundreds, he said.

Earlier this month, Chairman of the Joint Chiefs Staff Army Gen. Mark Milley called the test nearly a “Sputnik moment.” Last week, Defense Secretary Lloyd Austin declined to say if it was as momentous, but noted that the U.S. has many concerns about the military capabilities China continues to develop.

“We continue to move as fast as we can to develop capabilities,” Mr. Austin told reporters.

The U.S. hasn’t been as focused or moved as quickly to advance its hypersonic technology as Russia and China, defense officials have said, giving priority to other technologies instead. The Army said it would be ready to launch a hypersonic missile test in 2024. Meanwhile the Navy is looking to develop a hypersonic weapon that could launch off its destroyers and submarines.

Gen. David Thompson, vice chief of space operations at the U.S. Space Force, told the Halifax International Security Forum on Saturday that the U.S. has “catching up to do.”

China has had “an incredibly aggressive hypersonic program for several years,” Gen. Thompson said.

From Venezuela to Russia, data collected by FT map where machinery ended up

China’s ban on cryptocurrency mining in May triggered an exodus of miners and a global race to relocate millions of the clunky, power intensive machines they use to solve complex puzzles and earn bitcoin.

Fourteen of the biggest crypto mining companies in the world have moved more than 2m machines out of China in the months following the ban, according to data gathered by the Financial Times. The lion’s share of machines was hastily moved to the US, Canada, Kazakhstan and Russia.

Bit Digital, one of the largest US-listed crypto mining companies, hired an international logistics firm to extract its property from China and is still waiting for a batch of almost 1,000 machines to be released from the docks at the Port of New York.

“We started our fleet migration in March 2020, which in hindsight was a great move. When the ban was announced we had 20,000 miners in China,” said Sam Tabar, chief strategy officer of Bit Digital. Still, the company said it had to abandon 372 machines in China, which had “reached the end of their useful lives”.

Eight out of the 10 largest public mega farms based in North America have expanded the number of machines in their fleets since China’s ban, the FT’s figures show.

When the ban hit, Toronto crypto mining company Hut8 was bombarded with offers from panicked Chinese sellers, said Sue Ennis, the company’s VP of corporate development and investor relations. “We were getting calls from providers which were pretty opaque and one-sided,” she said. “They would ask us to pay $20m with no recourse if it does not arrive or arrives broken.” The company ended up adding 24,000 machines in June, from Chinese company MicroBT.

The “frenzied liquidations” triggered by China’s ban caused the price of an Antminer S19, a popular model among industrial miners, to fall by 41.7 per cent from May to July, analysis by mining company Luxor mining showed.

Chinese crypto mining machine manufacturer Bitmain, the maker of the S19, had sold 30,000 machines to Marathon Digital Holdings, a mining company based in Las Vegas, in August; while Maryland based Terawulf bought another 30,000. The company announced in June that it was suspending sales of its machines to “help the industry transition smoothly” and reduce the “great pressure” on the market.

Outside the US, Kazakhstan has become a leading mining centre. FT data show the bulk of the machines going to Kazahstan came from Chinese mining company Bitfufu, which shipped 80,000 machines to farms in Kazakhstan, and BIT Mining, which shipped 7,849 machines by August.

Another beneficiary of China’s ban was Russia, where in the weeks following China’s cryptocurrency mining ban, Moscow-based infrastructure hosting company Bit Cluster received over 5,000 machines from China, while Russian crypto mining company BitRiver said that since the ban it is now hosting 1.8m machines from exiled Chinese miners.

“The focus of the market has shifted from a lack of equipment to a lack of space for its placement,” said Roman Zabuga, a spokesperson for BitRiver. A couple of weeks before the ban, the company had to turn down a deal with a Chinese client looking to offload another million machines, he said.

According to Jaran Mellerud, a research analyst at Arcane Crypto, just under 700,000 Chinese machines have not been turned back on after the ban and are likely to be sitting in storage. Since many of these are older generation machines, like the Antminer S9, it is less cost effective to ship them to locations such as the United States. In July, the price of an S9 dipped to just $367.

This has led to older generation machines being scattered to less established mining locations such as Venezuela or Paraguay, where there is less regulatory stability but cheap electricity prices.

Juan Jose Pinto, co-founder of Doctor Miner, a mining company in Caracas, said the Chinese ban “is a great opportunity”. “We’ve been contacted by three different big Chinese miners so far to host around 7,000 machines,” he said. “If we had the resources we could host a lot more.”

Pinto said his company pays around $0.01 per kWh for electricity, meaning that it can effectively use older, more power hungry machinery like Antminer S9s. Although these machines are rickety and more prone to breakdowns, Pinto and his team have found imaginative ways to keep them in operation.

“We have what we call ‘the cemetery’, where we put miners that aren’t working, but have parts which are,” said Pinto. “If I have one machine with four broken parts and another machine with six broken parts, I unite them and hopefully build one good miner.” 

Digital Assets, a company based in Asunción, is preparing to host 15,500 miners in the coming months but faces competition from some Paraguayan locals who have started to buy machines and mine independently.

And owing to Venezuela’s battered economy, mining cryptocurrency is a way for locals to top up their earnings. “People mine in their houses with just one machine,” said Pinto. “In other countries, there are a few big guys with farms, here there are thousands of people with small farms. Making $100 extra per month makes a huge difference for them.”

Invesco and Bitwise cite regulator’s insistence on 100% exposure to bitcoin futures alongside other concerns

Invesco’s surprise decision to abort the launch of a bitcoin futures exchange traded fund in the US was partly prompted by its view that regulatory constraints would make it too costly for investors, the manager has revealed.

The $1.6tn asset manager last month shelved plans to launch a Bitcoin Strategy ETF just hours before the fund was due to list in New York.

The Invesco vehicle would have been the second such ETF to launch, just 24 hours after the ProShares Bitcoin Strategy ETF (BITO), which staged the second-strongest debut in history with almost $1bn of shares changing hands on its first day of trading. BITO currently has assets of $1.3bn.

Yet, despite the time, effort and money put into producing the 69,000-word, 75-page filing, Invesco told the Securities and Exchange Commission it no longer wished to pursue the ETF.

The Atlanta-based company said that concerns over cost and suitability for investors were a major factor behind its decision, particularly with the futures curve for bitcoin generally sloping upwards, known as contango, which means a fund typically incurs a loss when it rolls a front-month contract into a longer-dated one.

One roadblock was that it became evident the SEC was only contemplating permitting ETFs with 100 per cent exposure to bitcoin futures.

“We thought that CME futures were going to be a very effective element of the portfolio. We never thought they would be effective when they would be 100 per cent of the product,” said Anna Paglia, global head of ETFs and indexed strategies at Invesco.

Invesco’s ideal portfolio was instead a mix of futures, swaps, physical bitcoin, ETFs and private funds investing in the bitcoin industry, to help protect investors in the event of a liquidity crunch.

“Our inability to do that really drove our decision,” Paglia said. “The more we investigated the market and the space, the more we came to realise there are better ways of providing this particular exposure instead of going ahead and giving investors something that was not aligned with what they expect from Invesco.

“We ran a number of simulations and the cost of rolling the futures, produced a drag of 60-80 basis points [a month],” Paglia said. “We are talking about some big numbers, 5-10 per cent annualised. It was not going to be plain vanilla replication of the [bitcoin] index without significant tracking error.” She also cited concerns around capacity and liquidity in the futures market.

Paglia said Invesco had filed for a futures-based ETF within 24 hours of SEC chair Gary Gensler hinting he was comfortable with the idea of an ETF based on regulated bitcoin futures traded on the Chicago Mercantile Exchange. The SEC has continued to reject applications for any ETF based on holding physical bitcoin itself, a market the SEC believes is vulnerable to “fraudulent and manipulative acts and practices”.

“We knew that being the first to get out was really important, that was why we filed within 24 hours of Gensler’s statement,” she said.

It was only after it filed that Invesco conducted a “deep dive” to determine whether the product and wrapper would be suitable for investors, Paglia said.

“We really thought long and hard before pulling this filing. We know that people would ask questions and would be scratching their heads. It was easier to say ‘yes’ and see how it goes than ‘no’ and explain the decision. We had to make this hard choice and own the decision. I would do the same again.”

BITO was expected to be followed by almost a dozen similar vehicles, yet its only competition so far is from the $60m Valkyrie Bitcoin Strategy ETF (BTF) and the $9m VanEck Bitcoin Strategy ETF (XBTF), alongside the $10m Global X Blockchain & Bitcoin Strategy ETF (BITS), a hybrid fund that invests in a mix of bitcoin futures and the equity of blockchain-related companies.

San Francisco-based Bitwise Asset Management, which manages $1.7bn in crypto-related assets, was among the other houses to withdraw a filing for a futures-based ETF.

Matt Hougan, chief investment officer, accepted this was “somewhat unusual,” given “our filing was a lot of work, a lot of legal work, intellectual work and business alignment work”.

He cited two factors for the decision. Firstly, when Bitwise filed “we felt that there would be more flexibility in how the product is constructed,” Hougan said, without a need to create a Cayman Islands-subsidiary for tax purposes, and with the ability to hold the likes of Canadian spot bitcoin ETFs alongside futures.

Secondly, Hougan said BITO’s success in gathering assets had “overwhelmed” the ability of futures commission merchants, middlemen who solicit or accept orders to buy or sell futures contracts, who have responded by raising prices.

“Our view was that a futures-based ETF was going to be imperfect,” Hougan said. “When we filed we thought that it would be worth it, but costs built on costs — the contango, the commission merchants, added costs to work through a Cayman subsidiary — so that we ultimately decided it wasn’t in the interests of long-term investors.”

His view on the existing futures-based ETFs is that “if you are making a short-term bet [they] can be fine. For long-term investors there can be better opportunities out there.”

“Ultimately we want to bring a spot ETF to the market,” Hougan added. “Eventually [there will] be spot-based ETFs in the US. I don’t think we will be sitting here in three years’ time asking if there will be.”

Invesco said it was currently focusing on alternative ways of offering cryptocurrency exposure. Tt has launched two crypto-focused equity ETFs and also hopes to eventually win approval for a spot-based bitcoin ETF.

Things are fine, but sentiment is euphoric

Too-happy holidays

I’m not really sure what makes the market go up or down, which is embarrassing, because I have been thinking about it professionally, on and off, for something like 17 years now. But it does seem to help the market rise, or at least not fall, when:

The problem with these four interrelated factors is that they are not much of a warning system. They are all true, and then none of them are, or visa-versa, at which point the market is way ahead of you. But all the same it seems worthwhile, as we barrel towards the end of the year, to look at how we are doing in each area.

S&P 500 companies have reported earnings growth of 40 per cent from a year ago, according to FactSet. This is a big number, but who cares. It is largely a result of the reopening and energy prices. What matters is how much earnings will grow next year. The current estimate for 2022 is about 8 per cent earnings growth, which is good if not great by historical standards. What worries me slightly is that the estimates place most of the growth in the back half of 2022. In the next couple of quarters, the ones analysts can see most clearly, sequential earnings growth is not expected to be all that great. A chart from FactSet’s useful earnings insight blog:

Buybacks are absolutely booming. In the third quarter, according to Howard Silverblatt of S&P Dow Jones Indices, S&P 500 companies have bought back $225bn of their own stock, beating the Q4 2018 record. The pace of buybacks has picked up for 5 quarters now. This seems to me to be a major backstop for US stocks, though, as Howard notes, stocks are so expensive that as a percentage of the market’s value the Q3 buybacks, at about .6 per cent, were well below the average of the last decade.

Liquidity, measured as balance sheet expansion at the major central banks, has been growing at a steady pace, a bit under 10 per cent. Here is a chart from cross-border capital:

This looks OK, but tapering is coming in the US and Europe. What happens then? On the other hand, China might loosen policy if the real estate market there continues to degenerate.

A lot of the money that central banks are pushing into the system is still finding its way into equities but, according to BofA, at a slightly decelerating pace in the past few weeks:

The last factor, sentiment, is the only one that really looks outright bad. Below is Citigroup’s Levkovich fear/euphoria index, which is based on a bunch of things like short interest, margin debt, and the put/call ratio. It is way up into euphoria territory, at a level that has reliably presaged bad returns in the past. To use a weary Wall Street cliché, there is no wall of worry for stocks to climb:

A particularly dreary example of this comes from Bank of America’s fund manager’s survey. Managers (unlike the punditocracy) are increasingly confident inflation is transitory:

I think I may be the last pundit in the English speaking world without a settled view on what inflation is likely to do (I found both sides of Chris Giles excellent survey equally convincing). But I am quite sure I’d be happier about the market’s prospects if I thought fund managers were more frightened about it.

Overall Thanksgiving week scorecard: market is high and expensive, but support from earnings, buybacks and liquidity seems solid (if not perfect). Sentiment levels are terrifying though.