Macro Update: 02. November 2021
COVID-19 lockdowns, vaccine passports and protests, COP26 pledges and a dash of hypocrisy, interest in nuclear, inflation no longer transitory
Europe becomes the COVID-19 epicentre imposing new restrictions; lockdowns and vaccine mandates. These have triggered protests, strikes and riots. A brand new COVID-19 variant has arrived, named ‘Omicron’.
UN's climate change conference (COP26) in Glasgow; a bit of reiteration of past pledges among some vague promises, world leaders set out an explicit plan to phase out coal... which might be a bit more nuanced than that. There's some increased interest in nuclear energy, public sentiment seems to be changing in favour and small modular reactors are featuring in the news. More fossil fuel disinvestment and commodities take a breather.
Continued supply chain disruptions but also potential signs of easing. The FED begins tapering and transitory inflation is not transitory anymore, but it's good for the economy and it's the fault of panic buyers. What does the deflationist side of the argument say; we look at ARK's Cathie Wood and Bloomberg's commodity strategist Mike McGlone point of views.
COVID-19
Here we go again; Lockdowns, Vaccine Mandates, Protests and the New Variant ‘Omicron’
Europe is the epicentre of the winter COVID-19 pandemic in terms of cases, with multiple countries imposing lockdowns and vaccine mandates. Austria initially locked down the unvaccinated1, then the vaccinated and decided to make COVID-19 vaccination mandatory. More and more EU countries are enforcing COVID-19 related restrictions, something that has triggered a lot of protests with some of them resulting into violent riots2. These add to the protests we've been seeing worldwide mostly all around the west.
The following map from the Carnegie Endowment, even though it's not tracking every single protest, gives an idea of the general trend.
While we were looking for data on protests related to governments' restrictions during COVID-19, we spotted the following interesting infographic in Al Jazeera.
Apparently 2019 saw the highest number of protests worldwide in the past 10 years - more than double the 10 year average and higher than the 2011 ‘Occupy Wall Street’ movement - then in 2020 COVID-19 lockdowns happened and protests stopped. Judging by the fact that France, Spain and Greece implemented some of the strictest lockdowns when in the previous year they had record number of protests 3 4 5 makes us wonder whether COVID-19 was utilised by governments as a way to control civil unrest. We're not suggesting this is the case but it's an interesting correlation that needs to be further investigated.
Variant ‘Omicron’ emerges. Around the 26th of Nov 2021 we started seeing pieces in the media regarding the new variant6. Currently we're seeing more lockdowns and a push to get everyone vaccinated with booster shots. We believe we'll soon see the definition of ‘vaccinated’ change to anyone that has received all three doses of the vaccine (or two in the case of single dosed ones).
The protests that erupted in Europe and other western countries, highlight the dissatisfaction of part of the society with the established politico-economical power. These only add to the existing long term trends of dissatisfaction, rooted in deep systemic issues such as extreme wealth concentrations, transition from a manufacturing to a service economy, outsourcing of manufacturing to the East and culture wars, to name a few.
We don't think these structural issues can be resolved soon, especially not within the context of the current politico-economic establishment that created them; it's simply incapable of doing so. We believe COVID-19 was a pause on civil unrest and the governments' actions that were undertaken to deal with the pandemic -- financial and fiscal stimulus, lockdowns that highlighted supply chain issues and vaccine mandates that will probably increase the staff shortages -- will only exacerbate civil unrest and lead to more volatility and uncertainty in every aspect of our lives.
Finally, we wrote a piece going in a bit more detail on these issues and their potential impact on societies, democracy and the economy;
The Hapton Portfolio, "On Vaccine Mandates and a Polarised World".
Pfizer Vaccine Trial Data Integrity Issues; Is This a Surprise?
Recently we read in the BMJ7 the issues of data integrity and the poor practices that whistle-blowers have raised regarding Pfizer's COVID-19 vaccine trials carried out by a contract research company. Data integrity is very concerning; without good data you can't really do science, and when it comes to technologies such as mRNA vaccines that have not been mass distributed and tested to such a degree as we're doing today, data integrity should be the highest priority.
“I don’t think it was good clean data,” the employee said of the data Ventavia generated for the Pfizer trial. “It’s a crazy mess.”
We'll keep monitoring this development.
What Happens When You Get Tests Wrong
Here's another example of the repercussions of getting the data wrong. The Economist, "Botched covid-19 test results in Britain led to thousands of extra cases";
On October 12th the UKHSA shut down a lab run by Immensa, a testing firm. The agency said that the firm had incorrectly told 43,000 infected people that they were virus-free.
(…)
This implies that each faulty test may have led to 0.6-1.6 extra cases (the range reflects uncertainty over how many people who tested positive received earlier false negatives). Based on Britain’s case-fatality rate, this translates to 100-250 deaths.
The Green Transition
2021 United Nations Climate Change Conference
COP26 ran from the 31st of October to the 13th of November of 2021. World leaders and corporations got together, drove around in Tesla electric cars and made pledges and promises on how they'll save the planet by reducing CO2 emissions. Here's a little summary from the BBC8;
Countries will meet again to talk about further cuts to CO2 emissions
First time in a COP conference that was an explicit plan to reduce use of coal -- developing countries didn't really seem to like that
World leaders agreed to phase-out subsidies that artificially lower the price of coal, oil and natural gas
World leaders promised to stop deforestation -- seems quite vague at this point
Financial organisations controlling $130tn agreed to back clean technology
These are very interesting pledges and commitments but we're not sure how realistic they are. Shifting capital away from fossil fuels will probably exacerbate the energy crisis we're experiencing globally since renewable energy is not in a position to fully replace them. Supply shortages and challenges in key materials (copper, rare earths, steel, etc) that are needed for this transition to renewable will push the prices of these materials higher. The advancement of emerging economies and the fact that they need cheap energy too seems to be ignored.
Coal
Reducing coal usage, or to put it better persuading developing countries to reduce their usage of coal might prove to be more nuanced. China and India (among others) seem set to keep building coal fired plants9 10.
Heavy industry is relying on coal as well with the products of heavy industry -- steel and cement -- being necessary not only for infrastructure projects in emerging economies but for the green transition as well. The Diplomat, "Without Coal, What Happens to Cement, Steel, Iron — and Asia’s Path to Development?";
After the power sector, heavy industry is the largest source of carbon emissions, accounting for 27 percent of all CO2 emissions worldwide. Within heavy industry, the single largest emitter is cement, followed by iron and steel and petrochemicals.
(...)
Global demand for steel is projected to continue to increase by more than a third through 2050, driven by emerging economies such as those in South and Southeast Asia, where high populations require more infrastructure construction.
Even if thermal coal used to produce electricity becomes deprecated, metallurgical coal will still be required to some extent to produce steel and concrete, especially now that the world needs to build more wind turbines and solar panels.
We suspect -- as we've seen this already to some extent -- that once an energy crisis hits and the energy required cannot be provided by renewables, governments will use whatever source of power they have, be it oil, natural gas, coal or nuclear. Simply put, during an energy crisis all bets are off; governments will either have to deal with revolting masses or use whatever energy they can get their hands on. Euronews, "Soaring gas prices prompt European utility companies to go back to coal";
Gas-fired power plants had been cheaper to operate than their coal-burning equivalents for more than two years due to the added cost of carbon emissions, but that changed in around July this year.
Being invested in coal however, is a risky bet as coal companies face ESG pressures and increased disinvestment. For now, we remain invested in both thermal and coking coal companies but we'll keep following the developments and adjust our thesis.
Hypocrisy?
Reading the following articles one might think that world leaders say one thing publicly, while doing the opposite. Greenpeace, "COP26: EU hypocrisy exposed as climate conference wraps up";
With talks at COP26 in full swing and Europe in the midst of a spiralling energy crisis, the Commission acted to prolong the EU’s reliance on gas. It backed accelerated permits and funding for 30 gas projects worth €13 billion and kept an open door to funding for future gas projects.
NPR, "The Biden administration sold oil and gas leases days after the climate summit";
Eighty million acres of the Gulf of Mexico — an area twice the size of Florida — was put on the auction block on Wednesday. Energy companies, led by Exxon Mobil Corp., placed bids on just a total of 1.7 million acres, and it's unclear how much of that will later be developed.
And to close it off, the two week event focused on reducing CO2 emissions, emitted 102,500 tons of CO2 which is the equivalent of the total average annual emissions for more than 8,000 UK residents. These emissions make it the most carbon intensive UN climate conference yet11.
We still believe oil and natural gas are relevant but the increased ESG pressures makes it difficult to invest in the right companies; for now we're steering clear of the oil majors as they are the ones most prone to activist investors and ESG pressures.
Nuclear
Lately we've been seeing a lot of interest in nuclear energy, especially in Small Modular Reactors (SMR).
Rolls-Royce will invest £195m into SMRs in the next three years, which will allow them to secure a grant of £210m from the UK government12. Bill Gates' nuclear-power firm, TerraPower, is building a small nuclear reactor in Idaho with an expected cost of $170, 80% of it funded by the US Department of Defence13. We missed Bill Gates' investment gains in vaccine companies (Moderna, BioNTech, etc) but we won't miss this one!
A new tracking poll shows all-time high support in the US for nuclear energy, which should be good news for our uranium thesis;
We're seeing worldwide renewed interest in nuclear energy as a low CO2 form of energy. We remain invested in uranium and we think the recent dip is a good opportunity to add to our positions.
Fossil Fuel Disinvestment
We're witnessing more disinvestment from oil and gas majors for new projects14, which means that the supply in the future will probably suffer. In addition a lot of their assets are expected to be left stranded15 as we're transitioning to a green energy economy. We wonder if some Chinese or Russian companies will pick these assets. We're monitoring company spin-offs, asset sales and purchases as we believe there might be some good opportunities there.
The following chart found in the most recent “Q3 2021 Natural Resource Market Commentary”16 from Goehring & Rozencwajg shows the capital spending and production of the super oil majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). If you're interested in natural resources this is a must read.
We believe future production will not come from the majors, rather from smaller independent companies and from companies in countries that face fewer ESG pressures (eg: Russia and China).
A Short History of Energy
If you're interested to know more about the history of energy — where we came from, where we are and where we're heading to, check the following video from Goehring & Rozencwajg;
Goehring & Rozencwajg, "History of Energy"
Supply Chains, Shortages and Inflation
Supply Chains
Some supply chain issues seem to be easing while others aren't and might prove to last longer17. Interesting to see what the situation looks from the inside. We're not surprised but we also take it with a grain of salt, Ryan Johnson, "I’m A Twenty Year Truck Driver, I Will Tell You Why America’s “Shipping Crisis” Will Not End";
What is going to compel the shippers and carriers to invest in the needed infrastructure? The owners of these companies can theoretically not change anything and their business will still be at full capacity because of the backlog of containers. The backlog of containers doesn’t hurt them. It hurts anyone paying shipping costs — that is, manufacturers selling products and consumers buying products. But it doesn’t hurt the owners of the transportation business — in fact the laws of supply and demand mean that they are actually going to make more money through higher rates, without changing a thing. They don’t have to improve or add infrastructure (because it’s costly), and they don’t have to pay their workers more (warehouse workers, crane operators, truckers).
Fed Tapering and Transitory Inflation
The Federal Reserve begins to taper -- gradually reducing the pace of security purchases -- purchasing $10 billion less Treasuries and $5 billion less mortgage-backed securities18. We're also seeing a change of the narrative regarding inflation, slowly redefining what the Federal Reserve means by "transitory", while chairman Jerome Powell now expects inflation to last "well into next year".
An interesting piece in Project Syndicate19 highlights the change in the inflation-targeting framework of the Federal Reserve allowing them let inflation run hot for longer;
More recently Powel retired the word transitory for inflation as the ‘Omicron’ variant emerged, adding uncertainty to the FED's and other central banks' decisions. We don't think ‘Omicron’ is the cause for persistent inflation, rather the excuse of why it proved to be less transitory than initially anticipated;
Product Categories Impacted the Most by Inflation in the U.S.
The following infographic from Visual Capitalist shows which categories have been hit the hardest by the not-so-transitory inflation in the U.S. A similar situation to some extent is developing around the world; this is not a single country phenomenon.
Some Reactions to Higher Inflation
An opinion piece from MSNBC got published in the beginning of this month but got removed quickly, probably because of peoples' online reactions. RT has some screenshots and comments;
Bloomberg Quint, "America Needs Higher, Longer-Lasting Inflation", the keyword here is 'modest';
Inflation — particularly when caused by sharp increases in a few products — is politically unpopular. A modest sustained increase in prices and wages, however, would create a more stable U.S. economy by improving debt dynamics and giving the Fed more flexibility. In an uncertain world, those two advantages make higher inflation more than worth it.
It's easy to blame the consumers and call them ‘jerks, drongos and bloody idiots’ but here's a thought; maybe the reaction has more to do with peoples' lack of trust that their governments' can ensure food and goods availability at affordable prices. News.com.au, "Panic buyers cause permanent price rise in grocery stores";
The researchers suspect that since the pandemic began in March last year, labour shortages, supply chain issues, Covid-19 safety protocols as well as panic buying has pushed up prices.
(…)
West Australian Premier Mark McGowan had a few more choice words.
He called panic-stricken shoppers “jerks, drongos and bloody idiots”.
Politico, "ECB union seeks bigger pay hike in face of inflation";
"The gap between these two figures means that each of us will suffer a permanent loss in purchasing power," the IPSO board wrote in an email to all staff on November 17, seen by POLITICO. "The ECB is not able (or willing?) to protect its own staff against the impact of inflation!"
To protect ECB staff against the impact from surging prices, IPSO proposed that the ECB introduce "an indexation scheme through which our salaries would increase in parallel with inflation development."
The Deflationary Side of the Argument
It's always important to listen and analyse the argument of the other side.
ARK Invest, "Inflation, Oil, China, Commodities, Velocity of Money | ITK with Cathie Wood";
China is attacking real estate sector and most peoples' savings are in real estate; China will see slower growth
China iron ore price has dropped 50%, copper 15% among other commodities; we might be seeing the beginning declining commodity prices
We've seen inventory build up in our homes; this could also lead to lower demand and lower commodity prices
Car manufacturers don't have inventories because people bought them all and they might prefer electric cars as that's what people will want in the next years
Powerful secular deflationary forces building and feeding each other; AI, genomic revolution, autonomous vehicles, lower AI training costs
Bond markets are good at predicting inflation historically and they're sending signals that inflation is not happening -- rates are low rates because if inflation was persistent they would go up
Mike McGlone makes a similar argument in the Mining Stock Education podcast;
Mining Stock Education, "Commodity Price DEFLATION Coming Says Bloomberg Commodity Strategist Mike McGlone";
Why can't the long bond stay above 2%? Because deflation is predominant in the long term and what we're seeing is a blip, otherwise bonds would have gone up
Sees classic types of tops in commodities; Cure for high prices are high prices and prices are high
Tapering and tightening; the moment you see a wobble in the stock market all bets are off, this will send commodities lower, gold should benefit
We're using less commodities and elasticity in commodity supply -- degree of responsiveness of the quantity supplied -- is the highest ever because of rapidly advancing technology
China is in decline and has been in decline for 10 years; you can't be bullish copper.
Sees the next commodity super-cycle in Bitcoin
These are very interesting arguments but we're not very convinced. First of all they rely on the assumption that the bond yield curve can predict inflation. The fact that historically it did so doesn't mean it will continue to do so, especially when we live in a time where central banks have more control on the bond yield curve, thus sending the message that inflation is transitory.
In terms of commodities demand and supply, we direct you to our investment thesis, going more analytically through our investment thesis on the various sectors we're invested in. We believe the world will need a lot more commodities since more countries in the East are catching up with the west in terms of advancement and to support the green transition.
The Haptón Portfolio, "02. Investment Thesis, Part I"
The Haptón Portfolio, "03. Investment Thesis, Part II"
Other
Some other stuff happened as well, here they are;
Facebook renames itself to 'Meta' as 'The Metaverse' is becoming the next big thing in tech
Russia military build-up near Ukraine, while an arc of encirclement from NATO forces is appearing around Russia. Belarus says they'll back Russia if war breaks out in Ukraine
Tensions between EU and Poland, Hungary continue
US plans to release 50m of barrels of oil from the Strategic Petroleum Reserve and Germany suspends Nord Stream 2 approval, we wonder what this means for natural gas prices in Europe
Kyle Rittenhouse Trial