Wednesday, June 23, 2021

This Week's Message: More On Inflation, On China-driven Inflation and A Few Timely Portfolio Tweaks

Gotta stick with the inflation theme, as, like I keep saying, getting that one (essentially the dollar) right over the next few years will we suspect be key to investment success.

This chart of the US Dollar Index will look familiar to video watchers:

You'll recall the resistance we anticipated at the red line (50-day moving average), then the next resistance level we targeted should the dollar break above it (white line [large red arrow]).

And, as I stressed in recent presentations, as evidenced by last week's negative action across stocks and commodities, a rising dollar spells trouble for asset values in this current messy setup.

Here's a one-month look (dollar white, SP500 red, Bloomberg Commodity Index yellow):

Yep, again, a rising dollar is a killer right here, make no mistake. I.e., a falling dollar (which is inflation by definition) is the goal, assuming the powers-that-be aim to keep asset markets afloat -- which, by the way, is the safest of assumptions.

The thing about commodities versus stocks, however, is from whence they came.

Here's a 10-year look:

While, indeed, stocks may continue to hang in if the powers get their way, you tell me where true value/potential lies in a weak-dollar setup going forward.

So then, do we abandon equities and go all in on commodities? Well, no. We diversify -- we own both. Although, with regard to stocks, we do want to make sure we take on some exposure to resource companies (our energy ETF green, our miners ETF blue):

And to resource (commodity)-driven economies (our Latin American Equity ETF purple):

Speaking of Latin America, while we already have a small position in Mexican equities, the Latin Am ETF was just added today; which was one of 4 minor tweaks we implemented this morning.

The other 3 were the additions of Viacom/CBS and KRBN (carbon credits ETF), and increasing our position in MP Materials.

Here's a brief summary of our thesis for each: 

(Note: these are long-term macro plays we're making in our core asset mix. Not in any way to be considered recommendations to non-client subscribers [do your own research/due diligence and/or consult your adviser].)
MP is the only (in our view) legitimate U.S. publicly traded rare earth miner (essential to virtually all things tech and renewable energy). Huge love coming their way from government going forward.

Viacom got hammered recently by a hedge fund blowup, taking the stock from $100/share to $40. Their streaming platform is positioned very well going forward. Might be a nice property for Netflix to acquire if they could pull it off (although few are talking about those prospects).

Carbon credits are the device of global green energy accords. Essentially, companies are assigned limits on their annual carbon emissions. They are accounted for as credits that can be traded among institutions. I.e., those that come under the limit can sell credits to those who exceed them (to avoid penalties).

Latin America has been an underperformer (relative to U.S equities), is very cheap, and is uniquely positioned geographically, demographically and economically (although, as you know, there are always structural/political issues to consider) to, among other things, exploit the changing political posture and economic evolution of and demographics in China.
With regard to the evolution of China and its global macro impact, while there's much to parse there, when we're talking inflation we see the narrative ultimately turning on its head.

In a nutshell: China is largely responsible for the lack of inflation over the past several decades. I.e., in the process of unleashing hundreds of millions of workers, and therefore attracting huge global capital to exploit that cheap labor, the Asian giant distributed massive amounts of cheap goods literally throughout the world. Unequivocally disinflationary, big time!

Well, those days are essentially over. As China has become more of a consumption-driven economy, they in essence consume more of everything (including their own production). I.e., as their citizens grow into themselves, their tastes expand, their consumption increases, as does their wages, and as does global inflation. 

Note: Macro trader Yra Harris nicely articulates the China narrative in last week's Futures Radio podcast.

The Fed says they have the tools to fight back inflation should it become a thing longer-term. Well, perhaps, but they're talking interest rates. And as we've stress here ad nauseam for the past couple of years, given the record debt that presently sits on government and corporate balance sheets, seriously hiking interest rates right here... well... fat chance my friends. 

They'll (as an institution [individuals within will pay lip service to the threat]) perpetuate the "transitory" narrative till the cows come home -- or till you're paying $6 for a gallon of milk, if then.

Assuming that's the case, here's what one of modern history's finest says investors should do about it:
"Hedge fund manager Paul Tudor Jones told CNBC on Monday he would “go all in on the inflation trades” if the U.S. Federal Reserve remains indifferent to rising consumer prices. ... “If they say, 'We're on [the] path, things are good,' then I would just go all in on the inflation trades,” Jones said."

Well, no way we're going "all in", but, indeed, we are going there in a thoughtful diversified manner with a portion.

Thanks for reading!

No comments:

Post a Comment