Dueling Dualities

950 words – a 4 minute read.

First things first; equity markets hit another “pothole” this week as a 4% inflation print somehow surprised enough folks to lead to a big selloff. And here I have been talking about how the discounting process is accelerating – my bad. 

The inflation print coincided with Bloomberg headlines about 5 hour long gas lines – a headline that set the tone & could have been ripped from any US newspaper 50 yrs. ago. It was followed by the Musk comment on Bitcoin mining and energy usage which caused a big selloff in the Crypto space – a perfect coda for a rough week.

I believe we are closer to the end of the selling than the beginning – much of the hot thematic names are oversold and have retraced the entire move from last October. CBOE put/call ratio hit its highest since Nov – SPY typically positive in next two weeks. UST auctions went well, the 10 yr. is at 1.65% and EPS growth has been chart topping & way above past periods of similar Global Composite PMIs. 

I continue to think the testing time comes later this summer when the clean, post Covid collapse, inflation numbers will come out – we need to see what stability looks like to really determine whether one should be worried about imbedded inflation or not.

 I remain in the “transitory” camp though I have to report I was in the distinct minority on one of my favorite macro thinker calls this week. It is worth noting that most economists are in the transitory camp – most PMs are not. 

If we continue to follow the Covid 1st in, 1st out logic then China is suggesting inflation fears are quite overblown with its CPI up 0.9% y/y, core 0.7%. On the other hand China equity has been quite weak ytd, suggesting that US equity weakness as reopening commences should perhaps not come as a total surprise.

On that macro thinker call I laid out my Commodities Are the Boss view (link) & noted that JPMorgan reports investors remain UW Comm vs the positioning seen in the 2010-13 commodity bull market. 

I also noted the duality between physical Commodity price pressures & the “digitalization of everything” and how the interplay between these two might impact the direction of all asset classes: equity, bonds, FX & comm.

It now strikes me that investors will be required to hold multiple contradictory thoughts in their heads over the coming months – the dueling dualities of the title above.

Here are the lucky 7 I came up with:

Record Fiscal Stimulus & Lack of Sov Debt Supply - JPM says supply available to the private sector is the lowest EVER.

Commodity Price Pressures & “Digitalization of Everything” – how can inflation run hot when tech is infiltrating every space?

ESG & Energy/Mining Extraction – Will ESG elongate the Commodity boom by limiting new project financing?

Carbon & Copper – last year I noted investors could make $ in both old & new energy - now I think one can do the same investing in both carbon and copper.

Crypto & Commodities – To have Big Boy performance #s one needs to invest in both. Talk about a barbell!

Rising Break Evens & Falling Real Rates – big time alligator jaws between record low 5 yr. real yields & 5 yr. Break Evens.

Value led Equity Markets & Growth led Equity Markets – the twin engines that allows for bubble pricking while hitting new highs.

If you like the intellectual stimulation of the markets you are gonna love this year! 

Ok back to Musing on the markets; in addition to ARKK etc. having worked off the whole move from last Fall ACWX looks exactly the same vs US – the whole OP has been given back. I continue to like the laggards – esp. Lat Am equity as it reconnects to the commodity up move. Our good friends at Tellimer report that Lat Am mkt cap/GDP is 59% vs 109% for EM overall and 178% for DM.

While not an equity laggard, Europe has been a Covid vaccine & growth laggard. Its data flow of late suggests it will catch up fast with German confidence data at a 20 yr. high. The EU just raised 2021, 2022 GDP targets to 4.3% & 4.4% up from 3.8% - its increasingly likely that European GDP growth will outperform US growth next year. Japan is also interesting – its leading economic indicator (LEI) just hit a 7 yr. high and yet its equities have been quite weak of late.

Have you seen the BUND move? It makes USTs look pedestrian with the 10 yr. BUND selling off from -.85% to -.12% on the way to positive #s which will be great support for one of my favorites, the EU banks. BUNDS first went negative in 2016 and have been below zero for the past two years. Europe is about to take over from the US in the DM Reopening campaign.

Coming behind Europe will be EM with JPMorgan expecting EM GDP & EPS growth to surpass DM in Q4. As Dev Markets move beyond Covid to Reopening, Covid has become an EM issue & yet even here there are positive signs with case counts rolling over in a number of key countries – even India’s case count has peaked. EMFX is starting to move – it had its best week since Nov last week.

Ok enough verbiage, here are several videos and webinars to choose from if you want to delve deeper.

Monday’s GATE Advisory webinar  – some great charts from Jacques.

Two Versions of the Commodity Boss POV – a 15 minute Nucleus195 take and an hour long discussion with Ohmresearch’s Roberto Attuch. 

Enjoy!