California Dreaming
As ever I’d encourage you to join the Upside Discord Debate: a highly informed and thought provoking space, where all opinions and questions are welcomed.
Summary:
Invest carefully, we are entering a new structural regime and transition will be painful and volatile. Energy, commodities and infrastructure appear the best placed to benefit.
Food for thought:
Notes:
The week ended with no clear path to peace in the Ukraine, but a steady heavy and continued shelling, leading to an unending sense of despair about the whole horrendous escapade.
What is also not clear is the terms of any deal should one emerge. Clearly what is left of the Ukraine as an independent state will not be allowed anywhere close to the EU or NATO, but beyond that it is harder to fathom. One wonders if Russia will forcibly demand a removal of sanctions, which will place the West in a very uncomfortable position. It is hard to imagine them backing down, but it might place them in a very uncomfortable spot.
The larger geopolitical picture is hard to read too. The demise of the USD is premature, but certainly the noises from Saudi, India and China are not conducive to its hegemony. Change doesnt happen overnight, but the winds are certainly picking up.
Bond markets are inverting, which is a lead indicator to a recession in the US. They have not all flipped, but they are flatter than any pancake i’ve eaten out here, and the signs are ominous. Dare we whsiper Yield Curve Control? If the 10yr breaks out to the upside, it has to be on the cards.
The Fed is truly trapped, as while the inflationary hawks need to see rates over 2% this year, it is harder and harder to see that happening without something breaking. We noted this week in our “Good Morning Good Morning” section in discord the path diversion now between the UK and Fed, as well as the opposing path of the PBOC. The question we keep asking ourselves is this a symptom of deglobalisation or an accelerant.
Under the hood, a metric we obsess on is money flow, and given the reverse repo function of the market — it is oddly likely we see a huge surge in liquidity, in spite of the QT pressure.
This all makes markets very hard to trade (as Oil and Nickel have shown us this past week). The high growth names have been hammered, in China the KWEB has fallen inline with the Tech crash of 2000, implying a bottom must be in sight, particularly in light of the Chinese divergent policy on easing. But falling knives are dangerous things.
Commodities have performed excellently this year, and on relative valuations (at least) have much more room to go. However there is always political risk (capping prices, releasing reserves, supply risks, ESG) to these investments so while seemingly much better positioned from a risk reward perspective, they are far from no-brainers.
Crypto seems to be catching a bid, but this asset class is still very correlated with risk, and until it proves it can decorrelate in a meaningful way, caution should be taken across the complex — inspite of positive news of Eth’s merge to PoS coming very shortly.
The aggregate risk to the downside in growth equities seems obvious, as does the Upside in commodities. The source of inflation and its persistence are critical — we see supply based + debasement. One maybe transitory the other isnt.
Finally some names I’ve initiated some new ideas in (as ever these are not recommendations or advice, simply my own, personal — and maybe wrong — opinions)
