QO_Q2_2021_Sitecore_443x120_KVP_Qoute copy

In a globe drowning in capital, speculation is eating the world

Kay Van-Petersen
Global Macro Strategist

Summary:  Is it time to apply a 'scarcity framework' to your wealth allocation strategy?

As we continue to slowly but surely emerge into a post-Covid world, one of the few things that is beyond doubt is the level of money that has been pumped into the global economy. By some measures, just from a fiscal perspective we’ve seen over $20tn in government support globally, which is over 20% of the 2019 pre-Covid world GDP of $88tn. 

The fact that more than 80% of this has likely been from ‘developed markets’ also skews the distribution of that stimulus. And if you start to calculate the effects from just the Fed/Treasury and ECB alone from a monetary policy perspective, you easily get above another $10tn. So altogether we likely saw well over 30% of global GDP in both fiscal and monetary support in 2020.

Speculation is eating the world… surplus money is a commodity that is firing up asset class inflation 

The bottom line, regardless of whether or not this is your first rodeo, is that we are in a meta-regime like never before—make no mistake about that. Both fiscal and monetary taps have been unleashed at the same time, in magnitudes that border science fiction compared to just one or two years ago. 

We are seeing a shift in policy regimes, from one that has been a multi-decade monetary dominance regime, to one that is going to be a potentially a multi-year fiscal dominance regime. The latter cannot function without aid from the former, which likely means any last semblance of central bank independence is long out the door. What we have learned from the financial crisis of 2008 is that the “temporary” measures that the Fed and other central bankers put into place during the sub-prime crisis have been anything but temporary. 

Everyone talks about software eating up the world, but the real global ‘cookie monster’ is speculation. Speculation is eating up the world, through monetary and fiscal measures that circumvent, to delay, the need for structural change for an equitable society that is sustainable and addresses the climate crisis. 

Speculation is rampant across the ecosystem of capitalism. It does not stop with the hedge funds and proprietary traders, but also includes politicians, policymakers, taxpayers, non-taxpayers, corporations, CEOs, unions, lobbyists, political parties and other vested interests. Everyone is complicit, be they cognisant or ignorant of the fact. 

Deflationary assets such as the Amazon forest and Bitcoin are finite in their supply…

So the social zeitgeist exploding in the west is one of MMT: a nanny state (after all, Wall Street has been bailed out literally for over 100 years—doesn’t main street deserve to be looked after?), colossal levels of debt in the system and financial repression, all which will continue to drive up asset class inflation. Money is a commodity that is losing value with every new accommodative measure from governments and central banks. 

The allocation of that capital to talent and compelling investment opportunities is the true value creation. Even more so in an inflationary world, where we have seen multi-year spikes in commodities such as base metals (copper) or in the agriculture space (corn). It looks like the price of negative oil in the Mar/Apr liquidation event of 2020 marked the low of the commodity cycle in prices and demand

Oil has been on fire, up well over 30% YTD, as has the combination of having structural supply shortfalls that work in favour of the producers, as well as a levered play on the reopening of the world, both in terms of global activity picking up, and tourism and travel returning. The latter is likely to explode in the next 6 to 18 months, as we have been flagging on the Macro Dragon, as well as our Misery Index theme from our equity strategist Peter Garnry. It’s worth noting the energy etf XLE, names like Exxon [XOM], BP [BP/] and Woodside Petroleum [WPL] all fall in the ‘value’ camp and are still relatively cheap compared to their ‘growth’ basket peers in the tech space, even after the massive rallies YTD.  

Paradoxically, it seems like the world is running out of commodities…

The paradox is that it seems like the world is running out of commodities which, by definition, should not be rare. This is also happening before we have even fully opened up, let alone considered the potential trillions in infrastructure spend that are no doubt on the Biden/Harris agenda post the vaccination campaign, as well as to lesser extent in the eurozone. If this spending has to be financed through an increase in corporate taxes and/or financial transaction taxes, so be it. 

The asset classes that I am fascinated about are those that are deflationary, whether by construction in something like Bitcoin (there’s a maximum total supply of 21 million keys but in practice, given that around 4 million are lost, it’s more like 17m), or by mismanagement such as the Amazon forest (nature), or by thematically being a new investment thesis such as in the alternative protein or the psychedelic medicinal and therapeutic sectors

In one of our recent Macro interviews, we sat down with Geo Chen, a talented Macro Trader and passionate nature conservationist. Towards the end of the interview, he pointed out the enigma that nature globally is on an accelerated decline caused by lack of accountability, sustainability, incentives and actions by humans. According to the World Wildlife Fund (WWF), over the last 50 years our planet Earth has seen a decline of around 70% in the population sizes of mammals, birds, fish, reptiles and amphibians. 

So nature—which is part of the biosphere tapestry that keeps us alive, breathing air and having access to water—should be appreciating in value every second. And what’s the value of the biosphere, given that human beings cannot sustainably survive without it? Is it in the trillions? In the tens to hundreds of trillions? 

Those that find a way to tap into nature in a symbiotic and sustainable manner, as well as reverse-to-mitigate the current pace of the climate crisis, are going to make hundreds of billions of dollars. It is likely to spur the world’s first US dollar trillionaire and is likely part of the hype around Elon Musk who saw his wealth exponentially explode by over $100bn in 2020 alone. 

Deflationary assets—be they traditional financial securities, crypto, physical, land, nature or some hybrid combination—have scarcity working in their favour. By having a finite supply (for example, 5-star hotels close to the Kaaba in the Islamic holy city of Mecca, or around the corner from the Vatican, the home of the Roman Catholic Church) and inflationary demand, their price has a structurally positive convexity. 

One cannot ‘print’ more Vaticans, or Bitcoins, or Amazon rainforests…

One cannot ‘print’ more Vaticans, or Bitcoins, or Amazon rainforests, or any other ‘one-of-a-kind’ type of assets or investment theme. These range from patents, to toll roads on a key transport hub, to Singapore as a beacon city from global financial repression (where taxes are going up globally), to pioneering new frontiers such as psychedelics for medicinal and therapeutic uses (etf PSYK, Compass Pathways [CMPS], MindMed [MMED]), to exceptionally talented people and entities (think how little competence and leadership we have seen in response to the Covid pandemic), to non-fungible tokens (NFTs that will run on something like the Flow token), or even cashflows being seen as a form of scarcity over businesses that are valued solely on future hype.   

The fund managers, long-term investors and family offices that bring a ‘scarcity framework’ to assets and business models on their wealth allocation process and overall strategy will be the ones most likely to be outperforming in the future of this regime

In a world that is being eaten up by speculation, deflationary assets are the celestial anti-fragile pieces.   

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.