In yesterday’s video commentary I finished with: 

“…we have huge opportunities relative to our longer-term weaker-dollar/inflationary thesis that we think are going to play out nicely over the next few years. Next few weeks and months? I dunno…”

I.e., while we fully anticipate intense (at times) volatility across, for one, our commodities exposures, our base case relative to what are slow supply responses to increasing pricing dynamics remains very much intact.

The following charts, courtesy of Variant Perception, tell that story.

Global copper production (grey line) has hardly moved (actually contracted of late), relative to the big runup in price:

Oil and gas rig counts (black and grey) have not nearly responded to rising prices:

“The transition to ‘clean’ is all well and good but if the ‘clean’ part is not fully ready to take the baton from the ‘dirty’ than getting rid of the ‘dirty’ will only result in sharply higher prices for energy everywhere which will in particular hurt parts of the world least able to afford it.”

Note: this message will bounce around a bit from here..

We’ve stressed ad nauseam herein that while, indeed, we’re not presently staring down recessionary conditions, there’s a sense of artificiality around the current expansion. 

Case in point, personal income — when we subtract government support payments — hasn’t quite made it back to pre-COVID levels (HT Liz Ann Sonders):  

“As shown, ~20% of all trading days historically have been 1%+ moves in either direction, but October is easily the month that has experienced the highest frequency of 1% moves at 25%. While there have certainly been plenty of catalysts to move the stock market recently, we think part of the pick-up can simply be chalked up to seasonality. And whereas October and November are two months where market volatility is at its highest in terms of 1% daily moves, December has historically seen the lowest percentage of 1%+ moves as investors seemingly take a break for the holidays.” 

Rather than searching for new words to express the same near-term dynamics, I’ll finish up by copy/pasting from our last two weekly messages:

From week before last:

“…perhaps we should be freaking out over the plethora of market top signals that presently exist. Such as:

High valuation multiples, high corporate leverage, central banks (some) beginning to tighten, leading economic indicators rolling over, recession risk denial among economists, ISM new orders to inventories rolling over, yield curve flattening, negative technical divergences, bears capitulating and buying in, low quality IPOs aplenty, large share buybacks continuing, no shortage of M&A, high margin debt…. on and on!

Or, as was ostensibly the case on Monday, the threat of a credit/property bust in the world’s second largest economy (Evergrande/China)!

I of course could go on — abounding political/policy risk, yada yada — but suffice to say that uncertainty is indeed palpable as we sit here today.

Okay… So, uncertainty’s certainly thick, but what if anything do we indeed know for certain.

Well, we know that U.S. equity exposure remains the highest it’s ever been as a % of household net worth.

And we know that real property comprises the highest % of Chinese household net worth (74%!!).

Now think about the incentives/constraints/pressures the above two realities place on the economic/financial market impacting decisions of each nation’s respective politicians/policymakers!

If you’re thinking that those last two points do not a fundamentally bullish case make, particularly amid the historic toppy-ness of today’s markets, I couldn’t agree more. So I’ll try a bit harder.

Being that really bad bear markets tend to be things of recessions, the fact that employers are desperate to hire (10+ million US job openings presently), that our proprietary macro index reads +15 (odds favor expansion going forward), that ISMs (purchasing manager surveys) in both the manufacturing and services spaces are comfortably above 50 (the dividing line between recession and expansionary conditions), and so on, says that, for the time being, we shouldn’t be losing too much sleep over the risk of something ’08 or tech bubble-ish. 

Now, that last paragraph said, there’s this thing called reflexivity that says a major financial market meltdown could indeed bring the economy right down with it. 

And make no mistake, the Fed is uber-sensitive to what they call “the wealth effect” (people do stuff [spend] when they feel wealthy!). I.e., with all that household net worth tied up in such a toppy stock market, well,  you can bet that the Fed’s board members are indeed sleeping uneasily these days… Fearing a reflexive economic jolt should they misstep and induce a selling panic…

So, clients, if you’re at all wondering what keeps us so stubbornly and actively hedging our (your) major downside exposure these days, well, there you have it!

But what about beyond (amid even) these days, are there not opportunities (long-term in nature perhaps) to be exploited nevertheless — the risks outlined above notwithstanding?

In a word, yes.”

From last week:

“Is there cause for optimism around equities heading into the fourth quarter? Sure. Is there nevertheless some serious risk in the overall setup? Yes. Should we, even if the optimists have it right, anticipate some serious volatility in Q4? Absolutely!

Ironically, much of the stuff that allows for optimism is the stuff that defines much of the risk as well.

Optimistic expectations:

• No U.S default. Democrats can avert that all by their lonesome. And have all the political incentive to do so.
• Infrastructure deal gets passed.
• China successfully/bullishly kicks property bubble can down the road.
• Covid fears/numbers abate.
• Monster US spending package passes with lower tax hit than threatened. 
• Cash-rich companies announce dividend hikes and aggressive share buyback plans during the upcoming earnings reporting season.

Risks:

• The factions within the Democratic party get so sideways (i.e., progressives [via threats around the debt ceiling and infrastructure] leveraging their shot at reconciliation to get their spending/taxing agenda passed) that they actually fumble the ball. 
• China missteps and pierces its property bubble.
• Covid 
• Tax hikes resulting from the US spending plan spark an equity market selloff.
• Companies issue disappointing earnings guidance based on supply constraints and rising input costs.

Now, the above lists are anything but exhaustive. For example, we’ve checked a plethora of boxes across our list of the characteristics that typically mark a market top (gotta stay hedged right here!). However, the lack of net recessionary conditions says the odds of an ugly protracted bear market in equities remain relatively low.” 

Thanks for reading!
Marty