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 sector.
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, 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.