Our Macro Framework

Did I help you profit?

Please consider making a modest donation to help me continue producing valuable content.

The Blog article outlines  the macro framework expected to endure through this Summer.

Introduction

First off, a big disclaimer.   I hold myself out as a trader, not as a big, original macro thinker.  That said I think it is helpful to craft a narrative around big regime shifts believed to be occurring. From there, technical work can be done on sectors expected to benefit from these big shifts in policy and those sectors expected to experience stiff headwinds.  If the over-arching macro themes are correct, they should be easily confirmed in the charts. At the end of the day, I trade price, not ideas.  I will stay bullish or bearish sectors / stocks as long as those positions are working. When they stop working I am out.

Macro Framework Spring-Summer 2022

Shrinking Liquidity

The combination of aggressive rates hikes and balance sheet run-off are bearish for markets.  Markets thrive in times of ample liquidity ( easy financial conditions ) and starve in times of low liquidity ( tight financial conditions ).  Rising interest rates, quantitative tightening ( QT ) and a strong US Dollar all serve as liquidity extracting mechanisms. JPOW & Co. now have a singular mission to knock down inflation by the reverse wealth effect and slowing the economy / demand. The reverse wealth effect is aimed at the stock market and housing. The jury remains out as to whether or not or how long it takes to accomplish the goal but the FED has been pretty clear, it is going to try. Until we see a change from the FED I will assume they remain on this path until they break something. intended to These guys won’t stop until the market is down substantially. There will be lots of trades both bullish and bearish between now and then, but they’ve made themselves clear, they will insist on the market going down. This will be the over-arching theme from now through the summer.

  • Implications
    • When liquidity is ample, mal-investment flourishes. There is room for everything and everybody.
    • When liquidity disappears it exposes Bubbles, Ponzi’s and Frauds.
      • The re-think is already underway.  Money-losing companies and companies with PE’s in the 1000’s even after a 50% haircut are being liquidated.
      • If you need a good list of names as a starting point, look at the ARK holdings.  Cathie has done the hard work of aggregating the names.
      • You can also do a fast sort on Finviz using PE’s.
    • Crypto
      • No expert here, just a chart guy but from what I see, crypto thrives on liquidity and momentum
      • When liquidity and momentum die, crypto suffers.
      • I am expecting lower prices. Set aside your crypto belief system and watch your levels.
        • Even if you’re a committed bull, maybe after the dust settles you’ll be able to get long on a 50% off sale.

Here is an excellent 75min video that explains the linkage between global liquidity and capital markets.   HERE

Rising Rates effect on Banking.

Find the Video HERE

Commodity Super Cycle

“Spot Prices cure Surpluses; Long-Term Contracts solve shortages”  Jeff Currie Head of Commodities at Goldman Sachs.  Commodities, historically speaking, tend to trend in broad 10 year Boom –  Bust cycles. This is also coincident with capital funding cycles of the sector. The commodity boom of 2000-2008 was met with a wall of capital investment. This greatly expanded capacity of all manner of commodities. Then from 2012 – 2020 was a period of capital destruction and collapsing returns. The emergence of ESG has constrained re-investment into these “dirty Sectors” and is being championed by Larry Fink of Blackrock.   We are now in the upswing of the commodity cycle.  We are probably in just the first year of the upswing. We are literally YEARs away from seeing supply expand because no capital is yet flowing into the sector.  The exception of course is a recession. A recession will kill demand and cause most asset classes , including commodities.

Here is a 60min podcast that summarizes the commodity situation.  Find it HERE

Here is a webinar on Commodities ( Late April 2022 ) by Ole Hansen of Saxo Bank  Find it HERE

 

Energy Sector

Encompassed within the commodity complex are oil and natural gas. They comprise 50% of the commodity complex and merits a separate discussion.  I am extremely bullish on energy. Rather than write a narrative, I am going to bullet point the bull thesis.

  • War on Carbon.
    • Politicians in the West have declared open war on carbon before adequate replacement fuels were in place.  There has been no relaxation of these policies even as prices have dramatically spiked.
    • Why would energy producers put projects in place with billions at risk when the powers at be are actively working against you?  They wont.
  • Capital starvation.
    • 2011-2018 was a terrible time for energy investors. Billions in capital were incinerated as producers chased new production with little regard for return on investment.  Oil and NatGas prices crashed and many smaller producers disappeared.
    • Now, behind the curtain of ESG and having been recently burned, banks and other funders have been reluctant to provide the funding necessary to catalyze new exploration.
    • Politicians in the West have declared open war on carbon before adequate replacement fuels were in place.  There has been no relaxation of these policies even as prices have dramatically spiked.
  • DUC Destruction ( DUC = Drilled but Uncompleted Wells )
    • Oil fracking production has 2 main parts. 1. Drilling the Well  2. Completing the Well.   The 2 procedures are done by different teams with different expertise.
    • Think of DUC’s as “Well Inventory”  
    • Since Covid, Fracking companies have been depleting their DUC inventories at an alarming rate. Down 50% in 2 years. The industry has been eating its seed corn
  • 10 year chart of US rig count.  Roughly at 1/3 of the peak
  • OPEC Spare capacity appears to be a mirage
    • The playbook has been the same for at least 9months.  OPEC meets; raises production quotas; then most of the members miss the mark by a significant margin
    • They simply are not making up the supply gap

  • Russian Barrels simply are not coming back.
    • War, no war, I don’t think it makes much difference. The West is cutting off Russian oil and is on its way to find alternatives to Europe’s dependence on Russian NatGas
    • Lost on many people is how beneficial Western technology has been in helping Russia maintain and grow it’s energy fields
      • Western companies are now gone. The capital is gone, the expertise is gone.
      • If you need an example, look at Venezuela or Libya. Both were near the top of the list during discussions about oil production 10 years ago.  After the West pulled out of both countries, their oil production is little more than a rounding error on world supply.
  • NatGas: The massive Arb between the US and Europe will close
    • For an equivalent amount of NatGas energy, Europeans pay 4x – 6x more than Americans.
    • Europe is making plans to wean itself off Russian NatGas.  It make take years to accomplish but it will happen
    • LNG exports from mega NatGas producers US and Qatar to Europe are ramping.
    • Germany has green lighted 2 LNG import terminals; US is scrambling to expand export capabilities
    • The expectation is that the “jaws” of the US-Euro NatGas pricing arb will close with the price settling at much higher prices.
    • Beneficiaries: US NatGas producers; LNG shippers; Major Global Industrial Contractors w/ NatGas terminal building expertise
  • Major Conclusions
    • Global Supply of Oil is constrained
      • Given oil remains at $110 / BBL even with swaths of China shutdown, speaks to the situation.
      • Even if the Ukraine war ends tomorrow; Russia and it’s oil will be largely a no-touch commodity
      • US DUC depletion will soon go mission-critical
      • Western War on Carbon does not seem to be abating
      • Capital starvation to the industry continues; does not appear to be a rush to punch holes in the ground; watch rig counts
      • Saudi’s and OPEC not going to ride in on a white horse. They dont have the capacity.
    • Global demand continues to grow
      • If China lockdowns are cancelled you’ll likely see an oil moonshot; if they expand, it will probably hold oil near these levels with a drift higher
    • NatGas
      • I think prices move higher but they dont call it the widow-maker for nothing.
      • Expect volatile rips n dips
  • Doomberg has emerged as a good source of high-level thinking on the commodity / energy space / Food crisis space. No stock picking here, but more than enough to connect the dots.
    • Find the Interview HERE

 

Global Macro

Recently I’ve discovered the work of Peter Zeihan.  He does a good job putting the Russian – Ukraine conflict in historical perspective, along with a healthy dose of how demographics are playing a role in Putin’s decision making. His assertion that World War 3 has just started is provocative for sure, but seemed to make some element of sense. One of his assertions is the demise of China. In my opinion this is worth a listen, then you can decide. Find the podcast HERE

 

Get inspired, empowered and prepared!!

Join us!

As the host of Trader’s Profit Compass, I work hard to inspire, empower, and prepare aspiring traders to face the markets with fortitude, quiet confidence and inner calm. It’s a protein-rich, sugar free environment without ego or judgement. While I can’t promise that joining our group will change your life, I’d like to think it will help your trading. Give it a spin!  Nothing to lose and potentially much to gain.

Our group of aspiring traders are into active swing trading using technical analysis to find objective, high-probability,  low-risk trades.  Using these processes we’ve been fortunate to be winning; not perfect but winning. If that is appealing to you, join us!  I’d like to think you’d benefit from the work.  You’ll get premium  content 6 times a week including a copy of my Daily Profit Compass, Weekend Profit Navigator, along with other actionable content delivered directly to your mailbox. You’ll even get an invite to our new trading room on SLACK.

Registration is simple and FREE   Visit our homepage  HERE

Spread the word?

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest

Leave a Reply

Your email address will not be published.