“You thought polarization and conspiracy theories were bad before corpses started reanimating and eating folks?”
The world looks poised on the edge of a synchronous recovery on pandemic recovery, climate-change, renewables and infrastructure investments. It will fuel a massive commodities supercycle, but is not without danger in terms of currency confidence and debt risks. A key proxy will be copper – which could rally strongly, yet still looks cheap in dollar terms. However, the growing sense of fractured political polarisation and gridlock in the US suggests substantial dollar depreciation.
This morning’s Porridge is bound to upset my chums across the Pond.. Nothing infuriates ‘Muricans as much as criticising their politics, or suggesting the Earth’s economy might not revolve around them… but this blog is about market strategy, not pleasing Trump supporters.
The first part of this morning’s trade is simple – buy into global recovery. Post-Pandemic the Global Economy is set for synchronistic growth, fuelled by governments everywhere inflating their economies through new fiscal spending programmes. Growth since 2008 remained anaemic on the back of misguided government austerity policies. Growth post 2020 is going to be hyper-accelerative on the back of new fiscal freedoms Governments have found to spend, spend, spend! (Nothing upsets liberty loving libertarians as much as government spending programmes’ wastefulness, or the abuse of the currency they perceive.)
Since March 2020, government borrowing has ballooned to pay for immediate Pandemic relief and furlough schemes. It happened, and the skies did not fall upon us. Next up will be massive infrastructure, climate change/environment, health and education programmes on a scale we’ve never, ever seen before. Since every government is doing it, what’s the worry….? (Rhetorical question….)
All that spending is going to drive a massive commodities uptick; the super-cycle everyone is so excited about. Already we’re seeing key construction commodities rise. A key proxy beneficiary will be copper. The world functions on electricity, and you can’t pour a gallon of four-star volts into an EV without copper cables….
But.. and here’s an interesting thought – which was spotted by my colleague Julian Wheeler: at over $10000, copper is back to the record levels it last achieved in 2011, when the dollar was relatively weak at 75 on the DXY dollar index. Today copper is some 15% undervalued compared to its value of the dollar around 90. On the back of the rising demand metrics for copper, I fully expect it will continue to rise in price (Goldman has a $15k target), but is also likely to make significant gains relative to the dollar – which is likely to continue its recent slide.
Hence the trade – Buy Copper on the back of global synchronous growth…. But sell dollar?
Conventionally, you would sell a currency because of its overly-row interest rate, or concern about its credibility and rising debt. Both apply to the US. The FED has committed to low rates despite the like pandemic recovery – justified on the basis the economy will stage a brief recovery spike before calming back down to pre-pandemic activity levels. US Debt has expanded to pay the costs the pandemic programmes, and now will have to fund whatever programme Biden can push through. Every other major economy is furiously printing money… so why would the US suffer more than any other?
I’ll come back to further reasons to sell the dollar… but they are host of reasons to expect copper to rise; the demand for the kind of new “smart, connected” infrastructure every government had on its wish list, the need to replace and evolve national grids as renewable power becomes more important, and the replacement of carbon unfriendly internal combustion engine cars by electric is all significant. (I think I’ve quoted before that an EV used approximately 4 times as much copper (around 80kg) as an ICE auto.)
The super-cycle is not just about copper. Around the globe we’re seeing steadily growing demand for all strategic commodities. The tiny village of Hemerdon in Devon is home to the largest tungsten deposit outside China. The mine went bust a few years ago, was picked up for a few million by Tungsten West is now looking at a £100mm AIM valuation.
The big joke is that commodities analysts have predicted about 12 of the 4 commodities super-cycles that have actually occurred. It normally takes years to get a new mine into production – and in these years the boom conditions and demand that encouraged the developers to spend the money might have evaporated, meaning a load of new supply hitting the market after the top, accelerating prices falls as rising supply exceeds diminishing demand.
This time may be different. The last supercylce was largely fuelled by China’s infrastructure rebuild. This time it’s global buildout. Long-term infrastructure projects mean steady demand out over a decade or more, long-enough to drive a screed of new mine development now – which is why mining financiers and analysts are getting terribly excited.
Who knows, maybe the UK government will have a smart lightbulb moment and realise that using our own Metallurgical Coal from the mine I was trying to fund in Cumbria is better, less polluting, and more efficient than importing it from Australia or Steel from China. However, hoping for common sense from government is not something to base an investment strategy around. Hey-ho and ho-hum.
Whatever – Copper and global commodities look a solid bet..
Perhaps even more important is the second part of the bet – selling the dollar.
Why would you? The US is home to World’s largest, successful, valuable and most innovative companies. The dollar is the defacto global medium of exchange. The US president is widely acknowledged to be the most powerful man on the planet. Yet… there is something of a shadow upon the land…
As event unfold over the next 2 years into the mid-term elections, and the next full presidential cycle, the degree to which US politics is terminally broke will become increasingly apparent. Words like Gridlock, partisan, and polarisation dominate the news flow. While the rest of the globe gets on with rebuilding their economies, Biden has a short-window, and tiny majority in the House to push through his plans. He may become as irrelevant as Obama after the next vote.
I’ve been trolled many times for daring to comment on the non-functionality of US politics. Serious fund managers tell me I understand nothing – that I massively overestimate any ongoing danger from Trump, and underestimate just how deeply Biden is plunging the US into a woke dominated parody of socialism. As a global market strategist, I don’t particularly care about the politics, I just need to look at events and draw conclusions as to how investible the US looks on a relative basis? (For the record, I will state most Americans are wonderful people – until you start talking politics, at which point they tend to shed perspective..)
Can the Democrats turn around the economy and build the physical and social welfare structures a sustainable new America will require? Its’ record in the big cities is less than reassuring.
Meanwhile – can the Republicans offer a credible alternative? At the moment, the answer is no. Trump will remain an utterly destabilising feature from the bunker now that he’s conclusively demonstrated his reach and control of the party by the defenestration of Liz Cheney. The extraordinary recount in Arizona gives continued succour to Trump’s Big Lie.
Don’t take my word on how divided America is. A recent survey for USA Today found “destructive partisan devisiveness” is a huge problem. 54% of Republican voters are convinced Biden is taking them down the road to hell. 77% of Americans think the nation’s toxic political problems come from the top down, while a majority of Republicans still believe Trump was robbed of the election.
We could spend hours analysing policies and election trends, in much the same way US Sports commentators talk for hours about irrelevant data and numbers as if it actually meant anything.. The real issue for markets is where does a broken American political system put it on a relative basis to other economies?
There are massive “investibility” issues elsewhere – with Europe, the UK, or China – but these can’t be completely dismissed when the US looks likely to become even more politically dysfunctional.