Displaced and Mis-priced

18 Jul

Not a day goes by without being inundated with talk of  the electrification of the transportation sector; namely cars, buses, ships, etc..  The speed of such transformation, if you believe the hype (and we don’t) is happening at such a breakneck pace that carbon based energy will be as extinct as its own DNA. While we obviously have no insight as to the actual arc and velocity of change in the electric vehicle space, it is important to note that such anticipatory hype often produces opportunities in those sectors presumptively deemed extinct. We see value in the PGM sector as traditional catalyst metals will still be required, particularly as most growth in EV will be in hybrids. We also see growth in sources of traditional power generation; coal being one in particular, nuclear being the other.  While we are not convinced of the speed of the transformation of the drive train, we do believe it will happen and when it does the need for additional power generation will be paramount.Contrary to what the NY Times might have you believe, wind farms and solar will not be sufficient to get the job done.

Donald Driver

13 Jul

Packer Fans calm down, we’re not referring to the all time leader in Green Bay Packer yards receiving, but rather to the other Donald and what drives him, namely the Stock Market. Much like Clinton’s unhealthy obsession with the Bond Market, Trump seems to view the Equity Markets as his daily barometer of policy efficacy. This shouldn’t surprise us as both are highly irrational and short -term focused. While Clinton’s fixation on the Bond Market was primarily driven by budgetary deficits hawks (there used to be those), Trump looks at the daily gyrations in prices as justification for policies not driven by any sound fundamental underpinnings, but rather by the empty campaign promises of an avowed populist. The problem lies in the fact that companies make capital decisions based on their best guess of what the future may look like 5, 10, 15 years hence, and a scattershot policy agenda involving not only trade, but immigration, health care and a host of other third rail issues, is only a deterrent to the domestic capital investment requisite for sustainable long-term growth. While an Obama Presidency did leave us with a legacy of bureaucratic overkill, the current disrupter-in-chief has left us with an environment of permanent upheaval, an environment not conducive to either rising prosperity or equity markets.

Trump Island

29 Jun

Clearly The Donald  never read John Donne, author of the famous poem, No Man is an Island, which partially reads:

No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.

Donne is speaking of the collective “Europe” of course, but one has to wonder whether the losses initiated by the populist movements across Europe and the U.S. will cost us more than our collective souls. Harley Davidson, BMW, and others have made decisions to re-shore production in more advantageous locations directly as a result of populist driven legislation both here and in Europe. Therefore, the unintended consequences of serving the few while ignoring the many begins. Trade wars are not easily won, and much like real wars they involve collateral damage; jobs, currency devaluation, and inflation,  are only a few that come to mind as potential consequences of the short-sighted, voter pandering attitudes.

 

 

 

House Rules

28 Jun

In the global casino that is modern day capital markets, the U.S. has always acted as if it is the house. As you may or may not know, the house always has the edge in the various games of chance, the only difference being is the degree of edge. In its sports books, for example, the house really has no edge thus sports betting tends to be a loss leader for the slots business in which the house has a commanding edge. The ultimate edge for the U.S. in global capital markets historically has been the dollar. As the worlds reserve currency, and not coincidentally the deepest market for foreign trade and investment, the U.S.(dollar) stands as the arbiter of global capital flows. However, unlike the standard casino/patron relationship, the U.S. and its trading counterparts relationship is highly co-dependent. While it may be true that the major trading partners of the U.S. need the depth and stability of the worlds largest trading partner, the U.S. also needs captive buyers for the trillions of excess dollars generated through its cumulative fiscal excess. While it may seem reasonable to rail on trade imbalances, trade surpluses are virtually impossible with excessive and consistent fiscal imbalances (of the un-monetized variety).  The current administration runs the risk of underestimating this co-dependency, and in doing so puts the whole global economy in jeopardy.

Hammer Time

30 May

I’m not sure why but I love the adage ” To a hammer, everything looks like a nail”. While the phrase  can be widely interpreted and applied, my take is that it describes a world which is a very complex and intricate organism. Problems and issues are very rarely black and white, and most people view the world through their own self-interested lens. While this is simply human nature to attempt to simplify major issues and challenges, it seems like we are living in a world of hammers. The hammers are out in force worldwide as populist regimes not only here, but in Italy, The U.K. and elsewhere are attempting to push through agendas whose consequences are wholly indeterminate. Economic imbalances, such as trade and currency, are often a coalescence of forces, and not the result of one single driving factor. What is most frustrating to us however is that policy and societal issues which could use a hammer such as gun control, gender pay equality and fiscal prudence get little or no play.

Illinois Needs A Wall

16 May

A recent Chicago Federal Reserve study for dealing with the state’s fiscal crisis was perhaps a foreshadow of things to come. Mind you that I am referring to a legitimate, study done by The Federal Reserve, not some idea conscripted by a group of state legislators. The proposal suggests that a progressive statewide real estate tax, to be levied over a period of 30 years, would be the best solution for solving the intractable pension problems of the state. What was interesting was not only did it ignore the basic laws of economics but it was blatantly confiscatory in its tone and tenor. The basic premise is that the additional tax would be based on the value of the home and that such a tax would have a negligible effect on movement in an out of the state because:

Current homeowners would not be happy about this, but it would be a good result

for the Illinois economy. That’s because the new taxes wouldn’t affect people thinking

of moving to Illinois. While they would have to pay higher property taxes, that

would be offset by not having to pay as much for their new homes. In addition, current

homeowners would not be able to avoid the new tax by selling their homes and

moving because home prices should reflect the new tax burden quickly” 

In other words, home prices would drop so dramatically that people would be trapped into staying and people would be encouraged to move into the state because of reduced home prices. Debt at the Federal and State level are always someone else’s problem, until it becomes a collective reality. When proposals such as this begin to gain traction, the exodus from the state will be even more severe than it already is. Perhaps a wall?

BackwarDonald

23 Apr

The head tweeter-in chief has recently been targeting specific asset prices, tweeting on the relative value of the dollar, and most interestingly the “high” price of crude oil. His tweet last week ” Looks like OPEC is at it again. With record amounts of oil all over the place, including the fully loaded ships at sea, Oil prices are artificially high Very High! No good and will not be accepted!” Surely The Donald must be simply rehashing an old tweet from 3 or 4 years ago, because the only oil on the water now is heading towards satisfying a insatiable global demand. A quick look at todays crude oil forward curve, and its existing backwardation, would suggest that the days of surplus crude sitting in global cash and carry trades is non-existent. If the President feels that this situation is unacceptable then he should simply empty the SPR.