Monday, February 14, 2022

Morning Note: Global Commodity Crunch, Under-Owned (Foreign) Equities -- And -- All the More Precarious

In this weekend's video commentary we, among other things, took a look at the copper chart and explored why we're long-term bullish on the metal (and commodities in general).

Yesterday's Financial Times pulled no punches with regard to a global setup that presently screams higher commodity prices going forward. Although, as I expressed in the video, under no circumstances will the ascent be without notable volatility all along the way:

Here are a few snippets from yesterday's FT article:

"Copper stocks at major commodity exchanges sit at just over 400,000 tonnes, representing less than a week of global consumption."

"Stockpiles of some of the global economy’s most important commodities are at historically low levels, as booming demand and supply shortages threaten to fuel inflationary pressures around the world."
"“This is the most extreme inventory environment,” said Nicholas Snowdon, analyst at Goldman Sachs. “It’s a completely unprecedented episode. There is no supply response.” The shortages come against a backdrop of persistently high global inflation, fuelled by logistical disruptions and pent-up demand as economies recover from coronavirus lockdowns. Consumer prices in the US rose at their fastest annual pace in four decades last month to hit 7.5 per cent.""

"Other drivers of the shortages include a lack of investment in new mines and oilfields, bad weather and supply chain constraints caused by the spread of Covid-19."


I also expressed our relative (to the US) bullishness over non-US equities going forward.

Macro expert Lynn Alden sees what we're seeing, and shares our overall dollar view as well:
" investors are incredibly overweight large-cap US growth stocks, and American investors are incredibly underweight foreign stocks. Everyone is basically on one side of the ship, and it’s heavy to that side.
To the extent that they want to reduce those positions and shift more to value, it generally means a more international focus. As the Fed tightens monetary policy and puts pressure on expensive mega-cap growth stocks, it can drive capital out of them, and thus result in capital outflows from the dollar. Rather than being a liquidity crisis that sends the dollar up, this looks like more of a grind and rotation into different assets.""


Asian equities had a rough go of it overnight, with all but 3 of the 16 markets we track closing lower.

The weekend brought no reprieve with regard to the Russia/Ukraine situation. Hence all 19 European bourses we follow are in the red so far this morning.

US equities are mixed (leaning lower) to start the week: Dow down 279 points (0.79%), SP500 down 0.46%, SP500 Equal Weight down 0.45%, Nasdaq 100 down 0.04%, Nasdaq Comp up 0.02%, Russell 2000 up 0.17%.

The VIX sits at 29.82, up 8.99%.

Oil futures are up 0.53%, gold's up 0.29%, silver's up 1.28%, copper futures are down 0.45% and the ag complex (DBA) is down 0.60%.

The 10-year treasury is down (yield up) and the dollar is up 0.18%.

Among our 39 core positions (excluding cash and short-term bond ETF), 15 -- MP (rare earth miner), AMD (chip maker), Disney, silver, SOXX (chip makers), Brazil equities, water stocks, solar stocks and base metals futures -- are in the green so far this morning. The biggest losers this morning are energy stocks, carbon credits, Nokia, Indian equities, healthcare and financial stocks.

I also expressed in the weekend video how 2020's swift 35% decline and historically-brief recession accomplished essentially zero. I was referring to the "creative destruction" aspect of such events.

I.e., per Russell Napier:
" history is full of examples of how bad incentives produce bad behaviour, how bad behaviour is successfully hidden and how it is eventually revealed."

Quite the opposite that last go-round. In many respects bad behavior (among certain hedge funds, private equity shops, insolvent institutions, and, alas, unsuspecting newbie investors) actually got rewarded. Which makes the present setup all the more precarious...

Have a great day!

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