The “engineering a crisis” framework was laid out by David Beckworth (prominent Mercatus economist) some years back, using 2014’s tighter monetary policy backdrop to explain the movement (subsequently) in commodity prices, interest rates, and China.
And the set up of the major macro market variables today does have a solid similarity to it. Recall that China pegs to the US dollar, and as such, de-facto imports US monetary policy, regardless of domestic conditions.
The interest rate spread, such that it matters, has narrowed enormously. The currency devaluations (todays major announcement, and reason for the post) are now occurring.
The imported tighter mon pol through the peg and through US financial conditions, is coming at a maximally inopportune time given property sector collapse…
…and given the COVID zero approach.
The tradeables sector (China’s manufacturing powerhouse) cannot, otherwise, plausibly said to be “choked off”, in response to a stronger yuan, given otherwise strong exports growth, but for right now, with lockdowns, little moves, and pressures are building.
And all that stimulus that we are hearing about, would be perfectly exciting/supportive…
to a long-commods thesis…if those prices weren’t already through the roof, with almost all producers, including those most ill-advantageously positioned on the cost curve.
Incentive prices are still enormous. As such, it is very hard to see any reason to get behind either commodities directly, or their producers, at current valuations.
If the stimulus works, lockdowns are swift, and over shortly, then presently high prices are maintained. If not, they collapse, likely taking elevated stocks with them.
That seems asymmetric, in nature, to us, and hence we maintain our underweights to metals and mining, and (since our recent exits) energy too.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.