TPW Advisory Monthly: Climate, Crypto or Both?

While the Delta variant is todays story, the 2H narrative will shift to a DM vaccine production surge leading to EM vaccination spikes, reopenings and a synchronized global expansion.

Such an outlook bodes well for continued Equity/Commodity Overweights and Bond Underweights, USD weakness and revived non US, Cyclical and Value performance. Laggards like Japan become leaders.

With the main asset allocation set one can expand ones thinking to issues like Climate, Crypto or both? Climate is arguably this decades single biggest macro trend. Crypto can also stake a claim to be changing the world. The two share some similarities: both are open ended, have scarcity value & been around for years but have only recently caught investors’ attention.

My answer is both – Climate and Crypto are likely to be two of the biggest thematics in the decade ahead – investors need to focus, learn and invest accordingly.

CLIMATE

DM transportation and EM power generation are the two main carbon emitters. Carbon pricing unites the two and will drive the decarbonization effort. A carbon focus coupled with the “dual track” clean energy/fossil fuels investment thesis is the way to go.

The upcoming energy transition period will see supply – demand imbalances across the commodity landscape that will require price hikes to clear markets – a principal underpinning of my Commodity Super Cycle View.

ECONOMICS

The real question is what shape will the coming US slowdown take – will it be from 7% growth in 2021 to 4% in 2022 and 3% thereafter or will it be more abrupt – say from 7% to 3% and 2%?

Globally the story will be one of reopenings across Europe, Asia and Latin America, a synchronized global expansion as the global economy regains Q4 2019 GDP levels this quarter and begins expansion in the 2H.

POLITICS

US remains in the spotlight as Pres. Biden tries a “dual track” approach to both physical and social infrastructure. Lack of DC summer working days presents a challenge. Passage key to mitigate Bear Case risk.

Vaccination policies drive EM politics while Europe prepares for a busy Fall and PM Suga bets on a successful Olympic Games – a bet he is likely to win.

POLICY

With the bond vigilantes on the beach the Fed has a clear runway to set its tapering pace, a process we expect to begin in September.

The potential for above trend US growth is real given procyclical policies, a long overdue public and private cap ex boom & a productivity surge that leverages the tech advances of the past decade and sets up for more to come. Keep an open mind here.

Europe‘s JRF and Green Deal start to manifest with great potential to deepen European integration and set the stage for its own pro-growth cycle.

MARKETS

My “pothole markets” phrase gets some data validation: between 1994-2007 there were a total of 9 days with a 5% VIX move, since 2009 there have been 62 such days as market liquidity ebbs and machines trade. The outcome: faster, smaller pullbacks that investors should ride through. Don!t try to beat the machines.

Tactically the Delta variant spread vs the vaccine production surge is the main focus. Strategically the focus remains on thematics and especially climate. A deep dive into carbon reveals a real anomaly – a market that is structured for prices to steadily rise.

Earnings are up next & will be astounding – focus on the outlook, especially for 2022. 

Happy July 4th! Enjoy the sparklers!!