Got Game?

1200 words – a 4 minute read.

The gamification of Wall St is not a new idea, at least not since Robinhood burst on to the scene last Spring. But what about the gamification of the economy? 

It strikes me that’s one of this year’s lessons, one taken from the price action spreading from financial markets to commodities and on to power markets & the real economy. Its even spread into world trade via the pricing of shipping containers. 

What do I mean by gamification? Basically the rise of spot markets that are being used by speculators to drive prices that are then taken as signals by media and some economists to forecast things like inflation, stagflation and the “Shortage Economy” when really its just speculative capital that has gamed out the spot markets, sending prices skyward before taking their profits and moving on. Lumber, iron ore were early indicators; more recently its been uranium, Nat gas & coal.

The “meme” stocks started us off last Spring but now its energy prices leading to Govt policy action; its shipping container prices rising 5x before halving in the space of two weeks as profits are taken while the 5 pm news shows talk about Scrooge & Shortages taking away the Holiday gift season.

No worries, right – well yeah, until one realizes the whole world is extrapolating from the violence of the price action to assume shortages exist and will continue to exist for months if not quarters, potentially leading to policy mistakes and a feedback loop into the real economy. 

I think this will prove quite misleading & expect the real economy to respond much more quickly than is currently expected – so watch out players. It does suggest that a smart Fed will be a patient Fed; something to muse over this weekend.

The bulk of the following comments come straight from my notes from yesterday’s BTV hit on The Open show. While technical difficulties meant only a short phone hit these notes are for the full show.

From a tactical POV, I continue to think we have a good shot at a global equity performance chase into YE as three main headwinds switch to tail winds: sentiment, positioning, seasonality, all swinging positive (note the power of 3).

The litany of woes driving selling over the past 4 months has been legion: Delta, China regulatory, Evergrande, energy shortfalls, supply chain woes etc. etc. 

JC over at All Star Charts notes that as a result 91% of SPY constituents have had a 10% drawdown along with 98% of the Russell 2000. We have had a “Stealth Correction” that is more time than price based – a look at the charts tells one the majority of global equities have been going sideways since the Spring.

Energy fears way overdone - UK Nat gas prices have halved in past week; supply chain concerns overdone - China - LA shipping rates have fallen 50% in 2 weeks… Covid speed is wicked fast; extrapolation is wicked dangerous. MS scenario analysis suggests that a 500%, yes 500%, increase in EU wholesale gas prices would cut EU 2022 GDP by a piddly 40 bps off a 4.5% expected growth rate, yes, 40 piddly bps.

Strategically, I believe we are at the onset of a synchronized global expansion as the Asian economies re open and join Europe (the most vaccinated and most open economy) and the US. Massive inventory restocking, robust consumer demand (record hshld net worth in US and EU) and a cap ex boom (climate, infrastructure) provide the (power of 3) underpinnings. Citi’s ESIs have been outright negative across the globe – nothing but upside.

The 3 main transitions I wrote about last month are now underway: from liquidity to earnings driven equity markets (underway with Q3 results); from Growth to Cyclical/Value driven equity markets (underway the past month or so - just check out XLE/XLK) and the transition from 40 yr. bull market to bear market in UST (underway). The synchronized global expansion will underpin & drive all 3.

We are in a secular Commodity bull market across virtually the entire complex: fossil fuel, ag, uranium, clean energy, carbon, industrial metals etc. (100% of the GSCI is up on 3 yr. rolling basis - 1st time in 17 years). Technically, Commodities are the strongest of the Big 3 Asset Classes. 

Deeply oversold Gold miners (GDX) are the complex’s catch up trade. Have you noted how many assets got dumped at Q3 end? Gold and miners, Industrial metals, Japan equity really stand out. MS reports that foreign investors sold $7B of TOPIX futures at Q end - a 4 sigma event & the most since 2012.

Oil break out, rates break out support the synchronized global growth call - this week’s break out of the currency markets preferred global growth indicator, the A$/Yen cross, provides further confirmation. There’s the Power of 3 again.

In last week’s Musings I called Dr. Copper to ask him to join the party and boy did the good Doctor respond quickly – up roughly 10% since the low at Q end and reacting just as one would expect to the Asian re opening thesis. 

One to watch: the USD. Its quite rare for the USD and Comm to both move up at same time; typically doesn’t last long and usually USD falls away… watching for that to happen in coming months - think Fed Taper will mark USD high… Euro positioning is lowest since Covid start even though Europe likely to grow faster than US next year. Imagine the Commodity reaction when the USD falls…

So here’s the YE playbook. JETS for reopening, Japan (EWJ) for synchronized global expansion, XLF/EUFN for higher rates ahead – I expect the 10 yr. UST rate to break 2% by mid 2022. Two points to note: Nov has been XLF’s best month by far (past 5 yrs. av + 8% returns) and second: EU banks sell at 9x forward PE – a 40% discount to the Euro Stoxx 600 while the 10 yr. BUND heads to zero.

This week’s US Jolts report has kicked off lots of chatter about looming labor shortages – there is an ETF for that – check out BOTZ… already in place within both our Model portfolios… Reach out to learn more about TPW Advisory’s Model Portfolio Delivery Service (MPDS).

XLE has broken out & AMLP is finally moving up but I think energy is just getting going. XLE has underperformed the S&P by roughly 25% since Covid and by 70% over the past three years. Its weight in the S&P peaked at 16% in 2008 – its now less than 3% - can it get to 6% - seems plausible to me – DO NOT sell too early. IUSV and EFV for Cyclical/Value rotation - the real deal -not the appetizer we got last Spring. 

China equity for a contrarian play - Wednesday’s WSJ had a front page article about Pres. XI going after the banks and the 3 day result is higher China equity prices - anyone worried about China regulatory is already out. Asian equity markets have been down 4 weeks in a row. Opportunity knocks; don’t be afraid to answer.