Where the value rotation is now

good morning. Ethan here; Rob enjoys a hard -won vacation. For everyone who missed the letter from last Friday, Unhedged has a easier schedule this week - we are back on Friday.

The news from Ukraine are immense. As I write this, Russian troops are in Ukraine, but we do not know whether they are already on a soil controlled by the Ukrainian government. The USA say they are obliged to diplomacy "until the tanks roll". We live through the story and it is terrifying. I hope all readers in the region are safe.

The US markets were on vacation yesterday, and the S&P Futures prices a strong decline this morning after the European stocks were sold out. It is difficult to take care of what stocks do, but they pay us for that.

send me an email: ethan.wu@ft.com.

The value rotation pauses in the USA, but not in Europe

It feels far away now, but only last month the high market drama was the rotation to Value. An exaggerated headline in a large publication cheered him as the largest since 1995. Since then, however, the markets have had major problems. An indefinite restrictive Federal Reserve and the tensions between Russia and Ukraine all keep in suspense.

It is therefore not so surprising that the US value rotation has taken a breather. The assets held in Large-Cap-Value ETFs have grown by strong 4.3 percent since the beginning of the year, but according to Jefferies data, this has recently slowed down to a trickle. Since the end of January, the growth and substance indices of the Russell 1000 have been traded closely:

The most immediate background is the growing appetite for security. Gold beats almost everything else. The latest fund manager survey by the Bank of America showed the highest proportion of cash stock since May 2020. Perhaps the fear of investors has put the value rotation on hold?

This story is more difficult to see in European shares where the Pivot to Value chugs. Despite some fluctuations in the past few days, the European value continues to develop better than growth:

When we last talked about it in January, the US value still exceeded growth, only slower than the euro value. Duncan Lamont, head of research at Schroders, gave us two possible explanations:

A month later, the first point looks good. Absolutely speaking, energy stocks in the S&P 500 Value Index exceeded their counterparts in the MSCI Europe Value Index this year. But viewed weighted, the contribution margin of European Energy for the Europe Value Index was 47 basis points higher than the US energy equivalent. The story is largely similar for financial values.

The second point is more difficult to assess because evaluation data is published less frequently. Bloomberg estimates show that Europe's evaluation gap-the difference of the forward KGV between growth and substance indices-has been shrinking since the end of 2021, although this is subject to a strong quarterly revisions.

It is still early, but the value rotation in Europe looks more firm than in America. Which does not mean that the US rotation is doomed to fail, but that more has to run correctly. In Europe, strong banking and energy stocks that will benefit from rising interest and oil can do difficult work while other US sectors have to step in. We will keep an eye on this.

Bitcoin money laundering: Bug or feature?

Bitcoin has a problem. It is not very useful for things like the generation of income. It is also a bad payment method, provided that your goal is to make quick payments with low fees and low price risk. Newer bitcoiners usually murmur something of "digital gold" and move on.

But Bitcoin is reasonably decent in one thing: money transfers who do not require any official approval. This is not necessarily bad. During the worst of this year's Lira volatility, some Turks turned to crypto, which they saw as no less volatile than the official currency.

The problem from the perspective of a Bitcoiner is that it is not the only game in the city. Something similar happened in myanmar in December, where anti-Junta rebels used the StableCoin-Tther for transactions. And then there are the privacy coins, as Gary Silverman from the FT recently explained in a column:

[Some in crypto are] today are working to pour the laws on combating money laundering by creating so -called data protection coins - cryptocurrencies that are designed in such a way that they are difficult to pursue or pursue.

The threat from Privacy Coins can be found from the small print of a federal criminal complaint submitted this month, in which a couple from New York is accused of having washed revenues from the Hack of the Bitfinex exchange in August 2016, in which Bitcoin was worth 4.5 billion government at the time. The techniques that they supposedly used was the conversion of a part of the Bitcoin into a "anonymity -expanded virtual currency", according to the file, the most remarkable example of data protection is called Coin Monero.

Privacy Coins like Monero and Zcash use complex cryptography to disguise the identity of the people who deal with them. In contrast, Bitcoin retailers are identified by public addresses that are theoretically anonymous but can often be traced back in practice. This is exactly what happened in the federal investigation mentioned by Silverman.

Bitcoin is so bad. It is not a great option for privacy falcons (to describe them generously), nor is it so useful in itself. Its clout is based on a first-mover advantage and a loyal fan base, not on alleged characteristics of digital gold. But which water trenches will the crypto competition ward off in the long term?

Some Bitcoin fans want the cryptocurrency to become data protection. Here is Alex Gladstein, Managing Director of the Human Rights Foundation, who spoke to Joe Weisenthal von Bloomberg last week:

gladstein thinks it is a mistake that bitcoiners accept the premise that it is not good for money laundering. As he puts it: "It has to be good for money laundering if it is supposed to be freedom."

As he put it, there was understanding from the start that Bitcoin had no great privacy and that it was an intentional compromise at the beginning ...

According to Gladstein, data protection technology within the Bitcoin ecosystem is constantly developing. There are things like coin join where people can combine their bitcoins so that it is difficult to see who controls what.

Gladstein's vision is a Bitcoin that looks more like Monero than Ethereum, the purpose of which is to challenge state control. But since Krypto has spread beyond Bitcoin, this perspective of "freedom money" has lost ground compared to one that strives for a widespread assumption. Regulated, centralized stock exchanges such as Coinbase and FTX want trading volume and a regulatory ceasefire.

izabella Kaminska, who has just left the FT for its brand new The Blind Spot, does not find a bit of monetary competition:

crypto is a terrible system. And I would rather seriously not operate on his channels. But great authority is associated with great centralization, and having a annoying challenger in the mix is ​​probably a good thing. It holds the core system honestly. That is the reason why we also have a shadow government in politics. A Challenger system keeps things in balance and prevents the forces of corruption in the core system. The best scenario is one in which Bitcoin is available as an option but is used very rarely.

Kaminska explains in a separate blog post that the core systems of many democracies are not so honest and too often enact cumbersome anti-money laundering laws that do not stop corruption and which can be used against the political opposition in Germany.

This is a strong argument in a debate that I will not solve. What we are talking about is deliberately creating a gift for organized crimes so that dissidents around the world can resist the state power better. Perhaps all in all this is a good thing for humanity. But if I were an institutional asset manager with a Bitcoin allocation, I might be a bit worried that the leading theory for his long-term moat is to hug the shadows.

a good reading

An revealing blog post about the nature of the risk, complete with current data, by Aswath Damodaran from the NYU.