Charts of the Month - Jan '23
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“When we think about commodities in physical markets, they’re what we call volume-metric markets. They’re driven by the quantity consumed. To be bullish on an oil market or a copper market, it’s really easy. You look at the volume consumed versus the volume supplied. If demand is bigger than supply, you’re bullish. There’s no discount factors, no interest rates, just nothing. Either you’re long or short the stuff.
When we just think about the simple flow or economics of commodity markets, it’s just volume consumed; and in financial markets, it’s just simply dollars invested. I’m going to make an observation. When we think about high-income groups around the world, what do they control? They control dollars. Are there very many high-income people in the world? Absolutely not. So they cannot control volume. In contrast, the low-income groups control volume.” – Jeff Currie, Global Head of Commodities Research, Goldman Sachs
This excerpt comes from a great ‘Top Traders Unplugged’ podcast you can listen to here, from one of the best commodities researchers in the world.
What’s funny is that, from a figure slightly less experienced in financial markets and slightly more controversial, comedian and political commentator Konstantin Kisin gave a speech at Oxford University a few weeks ago where he hits on a very similar thread as Jeff, in a slightly more direct and potentially offensive, but no less true, monologue.
“The future of climate change is going to be decided by poor people in Asia and Latin America, who don’t care about saving the planet. You know why? Because they’re poor! And guess what, you’re not going to get them to stay poor.” You can watch the full speech here.
No two countries illustrate these points more resoundingly than the #1 and #2 largest by population: China and India.
From Jacob in our Laying the Foundation’s Research piece, “India has impeccable demographics – no other country in the world can compete with India’s size and youth… But India is also one of the poorest countries in the world, with a GDP per capita roughly equivalent to that of Haiti.”
Countries like India and Brazil are growing fast, and there is a tight correlation between GDP per capita, and oil use per capita, as illustrated by the dot plot of China.
As Konstantin noted, the West is not going to convince poorer countries to stay poor, and as Jeff noted, in volume metric markets like oil, low-income groups control volume. As poorer nations work their way up the GDP hierarchy, they will consume more oil. Hard stop.
This makes the next chart all the more believable, even if I typically don’t like these snapshot-in-time chart overlays.
The ‘Commodities Super Cycle’ bull case has been well documented by research firms ranging from Goehring & Rozencwajg to Goldman, and this chart of the ‘04-‘08 cycle vs. '20-Today adds an illustrative analog to the case. Given how the bullish for commodities economic and geopolitical stories are seemingly being written by the day (China reopening, the reindustrialization of the West, rising geopolitical tensions, reglobalization, growing EM economies, historically low fossil fuels inventories), triple-digit oil doesn’t feel like a stretch, with this chart suggesting an eye-watering $200+ per barrel price (which is a view the GoRozen team shares).
In a world of $200 oil, this next chart gets very interesting given 1) the negative economic impact this level of energy prices would have on consumer spending (Apple) and 2) the fact that Chevron just posted full-year earnings for 2022 of $36.5 billion (a record for the firm) with average oil prices last year of just $94 per barrel (Yes, there would be demand destruction at these higher prices, but not enough to offset a price increase this meaningful.)
S&P Year End Targets
A couple of weeks ago we put out our second Lykeion Research piece titled, “Max Geopolitical & Macro Uncertainty in Q1.” and a week before that, we published Diego’s Markets Update titled, “Max Uncertainty in 2023, So Focus on the Long Term”.
Needless to say, market uncertainty abounds, and no chart I’ve seen captures this theme better than this one.
Long story short, Wall Street strategists are just as confused as us.
Fundstrat is forecasting a 23% rise in the S&P to close the year at 4,750, with Deutsche Bank not far behind at a 17% gain to close at 4,500. On the other side, SocGen forecasts a loss of 5% to close at 3,650, and BNP Paribas, with the most bearish outlook of the group, sees a 12% loss for the index, closing at 3,400.
The average forecast of the 23 global banks polled is a 6% gain.
But as the chart suggests, this is the largest discrepancy in forecasts since 2009, during the heart of the Great Financial Crisis.
So buckle up.
It’s been well documented by us and others that the Feds not so little secret is that they need unemployment to go up to create the demand destruction they desperately need to help bring inflation down.
But they just aren’t getting it – the U.S. added 223k jobs in December (200k estimated), which brought the unemployment rate down another 0.2% to just 3.5%.
This is good for most workers, but not all.
Last year’s tech layoffs were well publicized with more than 140k losses across both private and public tech companies. The headlines continued last week with IBM and SAP announcing 3,900 and 3,000 employee cuts, respectively, which are on top of Google (12,000), Microsoft (10,000), and Amazon (18,000) all announcing cuts earlier this year.
So, when we peel back the BLS report, it’s no surprise to see Tech and Professional services as the only two sectors with losses last month.
But, let’s try to keep this in perspective – while no one wants to diminish the negatives a person and their families must deal with from being laid off – the reality is that tech has seen, by far, the most outsized gains in terms of market cap and consequentially, employee growth over the last decade-plus due to artificially low interest rates, the continued rise of passive index investing, and borderline monopolies within their sectors. Top this with explosive growth post-COVID fiscal stimulus, and the layoffs we’re currently seeing might be a bit easier to digest.
So, while no one wants to celebrate these layoffs (except the Fed), maybe the real problem was that these firms were hiring at a clip that implied an unrealistic rate of growth.
Not to mention that other sectors are doing great – consider how Chipotle just announced it’s going to be hiring 15,000 workers ahead of the busy Spring months, which lead The Daily Upside to write last week’s comical piece titled “Make Burritos, Not Code”.
One last lens to look at this topic through. Over time, businesses are becoming significantly less labor intensive, which funnily enough, has been driven in large part by the efforts of tech companies and the efficiency with which their products allow fewer people to manage multiple tasks, eliminating the need for a bulky workforce.
I won’t go on another rant against obscene consumerism in the West, but this chart definitely caught my eye.
With U.S. credit card debt making new all-time highs (approaching $1 trillion) and with most cards utilizing variable rates to charge customers with balances, last month rising interest rates finally caught up to consumers’ preferred method of payment, with the average rate shooting up to a breathtaking 19%.
However, this doesn’t necessarily mean people are consuming more – with inflation still significantly above average, those increased prices are stressing the consumer credit system, pushing balances higher, with a nasty doom loop of higher balances + higher rates -> more interest expense -> higher balances, and on and on.
Not surprisingly, an increase in expenses on one side of the debt spectrum can cause cracks elsewhere.
- Goldman reported their consumer segment lost $3 billion last year, a large portion of which came from loan losses.
- Ally Financial noted in their Q4 investor presentation that recent auto loans made between late ’21 and mid ’22 are already experiencing “elevated losses” versus expectations.
- KB Homes (the 6th largest homebuilder in the U.S.) saw a massive rise in canceled contracts in Q4 last year.
Last month we looked at how rising rates are going to affect interest payments on government debt, where ~50% is maturing over the next few years and has an average effective rate of 1.6%... today’s refinancing rates are significantly higher. And while we know that at present, consumers’ balance sheets are reasonably strong (we’ve written about this here), this month, they get the spotlight as the situation continues to deteriorate.
Sovereign Wealth Funds
What do Oil & Gas, Semiconductors, and Electrical Equipment have in common?
Countries that export them tend to be really well off (with exceptions of course).
Of the 15 largest Sovereign Wealth Funds in the world,
- Seven countries are represented; UAE has three funds and Singapore has two (if combined, UAE would be the #1 country on the list and Singapore #4).
- Of the 15 funds, nine of them come from countries where Oil & Gas are their #1 and #2 export (UAE having three).
- Integrated Circuits (semiconductors) show up in four funds as their host countries' #1 or #2 export.
- Electrical Machinery & Equipment is the #1 export of the largest fund, China Investment Corp., and is the #2 export of Hong Kong, which has the 7th largest fund.
- Gold, Cars, Iron, and Coal round out the other exports, and Australia is the only country that doesn’t have Oil & Gas, Integrated Circuits, or Electrical Machinery & Equipment as a #1 or #2 export (it’s also the smallest fund).
America… Becoming Great Again?
The Inflation Reduction Act (here’s a refresher) is doing what it actually set out to do (not what the name of it explicitly states it will do).
Whether or not this bill actually helps lower inflation (it likely won’t but it was a great way to capitalize on the zeitgeist to push a piece of legislation through with mostly bipartisan support), what it and another bill similar in aim, the CHIPS and Science Act, are at their core, are thinly veiled attempts at bringing investment back to the US of A. If you squint and ignore the signature on the bill, you could be tricked into thinking these were MAGA pieces of legislation.
Politics aside, and even if you don’t believe in solar as a viable, scalable, and economically or environmentally efficient means of energy production (I don’t), the act is already making waves.
“The goal of this tax credit structure, first put forward by Georgia senators Jon Ossoff and Raphael Warnock… is to make each stage of the solar production process cost competitive with materials and products coming from overseas.”
Now, Qcells, a subsidiary of Korean-based Hanwha Group, has just announced the largest clean energy manufacturing investment in US History. A $2.5 billion investment to expand its Dalton, Georgia facility to expand its solar cell and modular production, which will add 2 gigawatts to its current 3.1 gigawatts of production capacity. Considering that last year the U.S. produced a total of 11 gigawatts, this expansion is meaningful. Still far shy of the global 500 gigawatts produced but moving in the right direction.
I’ll leave you with this excerpt from our Doomberg interview a while back. When asked what his priorities would be if he were made Secretary of Energy, part of the fowl’s answer was, “I would build out polysilicon production in the gas fields. People don't realize it takes an enormous amount of energy to make a solar panel. The energy penalty [of solar] is mostly paid in the production of polysilicon which is where you basically take sand and you turn it into pure metal so that you can make your solar panels, slice them up into little thin wafers, and you glue them on the boards and connect them and all that stuff.”
The U.S. has the gas, and now it’s bringing on the production capacity.
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If you haven't had a chance to check out our new Research publication, we've released two to date, a foundational primer here and the first core publication here. We'll be hosting an Ask Me Anything with Jacob & Roger on Monday, Feb. 6th at 2PM EST / 7PM GMT on Twitter Spaces, so make sure to follow us and set your calendars (oh, and make sure to read the last publication so that you can engage and ask your questions).
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