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This Week in Charts 

Screening at Canadian Airports 

Japan’s carbon goal is based on restarting 30 nuclear reactors 

Japan’s goal of reducing carbon emissions by 46% by 2030 is based on the assumption it will restart 30 of its nuclear reactors, a top ruling party executive said. 

Akira Amari, secretary-general of the Liberal Democratic Party, made the remarks Sunday in a televised debate broadcast by NHK ahead of the Oct. 31 general election. 

The LDP has also been promoting the idea of building small modular reactors, saying they are safer than Japan’s existing atomic plants. Amari said Japan was in a particularly difficult situation in meeting carbon targets because it has no power links with other countries and doesn’t have reliable prevailing winds. 

Is it an investment? Is it a game? No, it’s eToro

The internet, cryptocurrencies, user-friendly trading platforms, and a pandemic-induced glut of spare time have gelled into a perfect storm that has redesigned retail trading as something that feels more like a game, and has transformed social-media friendly investors into quasi-influencers.

Israeli trading platform eToro, which launched in 2007, has been pioneering what the industry calls “social trading” features for over a decade. Users on the platform can follow other traders, check out their performances over time and, if they are keen, copy them. The most copied popular investors are rewarded by eToro with perks and a monthly payment.

As the world’s health conditions deteriorated – to wit: during the Covid-19 pandemic – more and more people popped up on eToro. In the first quarter of 2021, the platform gained more than three million new users, passing 20 million global users in June 2021. “I do see it increasingly among the younger generations: they have a sort of ‘don't care’ attitude towards losing their money, towards investing in risky things,” Smith says. “This meme culture and joking about their investments – I think it's gonna be a strange future, but I'm excited for it as well.”

Inconvenient Truths 

In 2020, U.S. natural gas prices hit the lowest levels since the mid-1990’s, driven by the emergence of advantaged shale gas basins, the overcapitalization of the shale oil industry, and a short period of disequilibrium while incremental demand from LNG and chemical plants came online. Fifteen months later, prices are at their highest seasonal level since 2008 as associated gas from shale oil has declined and as global demand for gas causes U.S. LNG facilities to run at full capacity. So much for “perpetual sub-$2.50 gas.” 

While prices and availability will normalize over time, the current environment exposes a number of realities which run counter to conventional wisdom and highlight the risks of allowing politics and ideology to interfere with scientific debate and economics. Specifically, there are three interrelated topics that deserve special consideration: 

• Raw materials are integral to the Energy Transition. Creating the energy complex of the future will require raw materials. In this piece, we’ll focus on natural gas which is a key enabler to reducing carbon emissions today and keeping energy prices in check while we invest in the technology and infrastructure necessary to attain net zero in the future.
• The Energy Transition will be inflationary. The inherent limitations of renewables, rising input costs driven by geology and capital scarcity (see point 3 below) and the introduction of carbon pricing will result in structurally higher energy prices going forward.
• The Hypocrisy of Divestment and ESG Investing. Refusing to invest in responsibly sourced enabler commodities increases global emissions while exacerbating income inequality on a global basis, thus resulting in outcomes that run directly counter to the stated objectives of these policies. 

It Don't Come Easy - The Energy Crunch, Decarbonization Goals, Forecasts, And Putin

Given all the talk lately about ESG, decarbonization, and the rise of renewables, it may come as a surprise to learn that the U.S. Energy Information Administration’s (EIA) reference- or base-case forecast for global energy sees substantial increases in natural gas supply and demand over the next three decades. 

In that report, which was released earlier this month, the agency said that under its base case — and (importantly) “absent significant changes in policy or technology” — global annual energy consumption will increase by nearly half (to just under 900 quadrillion Btu, or qBtu) by 2050. 

With that caveat about the base case in mind, EIA said that demand for petroleum and other liquid fuels will grow by 36% by 2050 and remain the world’s largest primary energy source. EIA’s base case sees energy-related CO2 emissions increasing to well over 40 billion MT/year by 2050 (left graph). That doesn’t sound much like decarbonization. 

Putin’s Fools Rush In 

Earlier this week, Ursula von der Leyen descended from on high, tablets in hand, to deliver a somber message to the shivering masses of the Old Continent. According to euronews, von der Leyen has grave concerns about the energy crisis currently befalling Europe. 

To believe von der Leyen, Europe’s energy conundrum is an immaculate crisis, conceived without any consummation by the European elite. They just woke up one day to find they were importing 90% of their natural gas needs. That Russia now controls their energy future is nothing more than a random and unfortunate event beyond anybody’s control. With no rooms left in the inn, Europe will just have to settle for Putin’s manger. 

Better still is her proposed solution to this newfound shortage of baseload power. According to von der Leyen, what Europe needs now isn’t a rejuvenation of its fledgling nuclear power industry, nor systematic investment in domestically produced natural gas. Instead, Europe needs more intermittent power! There’s a hurricane coming, and Europe needs to board up its windows. No hammers, you say? Quick! Buy more saws! 

Inflation

This week in charts

This week in charts

Money has never been this cheap

Citing “inflation” on Earnings Calls

Container shipping by vessels

60/40 Portfolio VS Inflation

The recent synchronized selloff in U.S. equities and Treasuries was likely just the beginning of what’s to come for the popular 60/40 stock-bond portfolio strategy, a growing chorus of Wall Street strategists warn.  

 

Underpinning all these warnings is an economy that’s now facing mounting inflationary pressures after spending years warding off the threat of deflation. During the last two decades, subdued growth boosted the allure of the 60/40 strategy, one that’s built on a negative stock/bond correlation where one serves as buffers for the other. 

 

With inflation fears raging, the worry is the Federal Reserve will seek to slow down the economy and rising rates will spell trouble for both bonds and stocks. September offered a taste of the pain, with a Bloomberg model tracking a portfolio of 60 per cent stocks and 40 per cent fixed-income securities suffering the worst monthly drop since the pandemic started in early 2020.

Do you have a Financial Therapist?

The Financial Therapy Association, founded in 2009, now has 317 members, a 51% increase in just four years. This spring the CFP (Certified Financial Planner ) Board broke precedent by adding the psychology of financial planning as a new “principle knowledge topic” required for study and continuing education to be a certified financial planner.

 

The Financial Therapy Association defines this approach as a process “informed by both therapeutic and financial competencies that helps people think, feel, communicate and behave differently with money to improve overall well-being through evidence-based practices and interventions.”

 

Its founding president, Sonya Lutter, believes that RIAs and wealth managers will inevitably either have financial therapists on staff or routinely refer clients to therapists just as they refer clients to estate planning specialists or accountants. 

Hedge funds cash in on energy stocks

Hedge funds have been quietly scooping up the shares of unloved oil and gas companies discarded by environmentally minded institutional investors and are now reaping big gains as energy prices surge.

 

Hedge fund managers in the US and UK have been betting that the eagerness of many big institutions to be seen to embrace environmental, social and governance (ESG) standards means they are selling wholesale out of fossil fuel stocks, even though demand for some of these products remains high.

 

“It’s such a great and easy idea,” Crispin Odey, founder of London-based Odey Asset Management, told the Financial Times.

 

“They [big institutional investors] are all so keen to get rid of oil assets, they’re leaving fantastic returns on the table,” added Odey, whose European fund is up more than 100 per cent so far this year.

 

Alongside Odey’s fund, Goldman Sachs’s prime brokerage division, which provides a range of services such as stock lending and execution, recently told clients that energy stocks had had their biggest net buying by hedge funds since late February, according to a note seen by the FT.

 

This week in charts

Chinese house market

Teens' behaviour

India coal crisis 

Indian utilities are scrambling to secure coal supplies as inventories hit critical lows after a surge in power demand from industries and sluggish imports due to record global prices push power plants to the brink.

Rising oil, gas, coal and power prices are feeding inflationary pressures worldwide and slowing the economic recovery from the COVID-19 pandemic.

"The supply crunch is expected to persist, with the non-power sector facing the heat as imports remain the only option to meet demand but at rising costs," ratings agency S&P's unit CRISIL said in a report this week, adding it expected Asian coal prices to continue to increase.”

Coal prices from major exporters have scaled all-time highs recently, with Australia's Newcastle prices rising roughly 50% and Indonesian export prices up 30% in the last three months.

German workers strike for higher pay

Increasing numbers of German workers are demanding higher pay amid rising inflation, with some going on strike, causing economists to worry that widespread demands for higher wages could start a self-fulfilling inflationary spiral in Europe’s biggest economy

German inflation rose to a 29-year high of 4.1 per cent in September, while in the 19-countries that share the euro it accelerated to a 13-year high of 3.4 per cent, official data showed on Friday. Lifted by soaring energy prices, that is higher than the 3.3 per cent rate expected.

“Inflation in Germany keeps going up,” said Frederic Striegler, an official at the country’s biggest union, IG Metall, explaining its demand for a 4.5 per cent pay increase and extra early retirement funds for wood and plastic workers at Carthago and other companies in the Baden-Württemberg region of southern Germany.

Unions are making similar pay demands for German workers in other areas, such as banking and in the public sector. This week, retailers and mail order companies in the Hesse region agreed to raise their workers’ pay by 3 per cent this year and a further 1.7 per cent in April next year.

Nature shows how extremes leads to extremes

2017 brought one of the wettest winters California had seen in recent memory. It was called a super bloom, and it caused even desert towns to be covered in green. That seemed great, but it had a hidden risk: A dry 2018 summer turned that record vegetation into a record amount of dry kindling to fuel new fires. So, record rain led to record fire.

The point is that extreme events in one direction increase the odds of extreme events in the other. Record good leads to record bad – just like California’s fires. And isn’t it the same in the stock market? And in business? Energy went from negative prices last year to global shortages today. NYC rents went from plunging to surging. Shortages lead to gluts; busts seed the next boom.

The most astounding force in the universe is obvious. It’s evolution. The real magic of evolution is that it’s been selecting traits for 3.8 billion years. The time, not the little changes, is what moves the needle. Take minuscule changes and compound them by 3.8 billion years and you get results that are indistinguishable from magic. And isn’t it the same in investing? If you understand the math behind compounding, you realize the most important question is not “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?” 

 

This week's interesting finds

The price of long-term outperformance 

When it comes to meeting long-term financial goals, the sad reality is that many investors don’t get there. How they feel today influences the decisions that affect them in the years to come, and they often make avoidable, emotion-driven mistakes. The discomfort of being different from the crowd, watching their investments underperform or jumping on the latest "hot" market trend are among the pressures investors face regularly. 

Humans evolved as herd animals, so departing from the safety of the crowd is fighting against an instinct ingrained over thousands of years. 

However, while summoning rare emotional discipline is hard, it’s not impossible. First, having an advisor who keeps things in perspective is key to staying calm through difficult times. Second, finding an investment approach you can understand, believe in and commit to for the long term is also important. The road to compounding wealth isn’t smooth, so it helps to have a map that shows you the way.   

This week in charts

Lenders haven’t taken this much risk (or whatever the title I gave you was)   

Axing the ESG buzzword 

Some of Europe’s largest asset managers are starting to drop the once-ubiquitous ESG label from their company filings. They’re concerned that regulators will no longer tolerate vague descriptions of environmental, social and governance investing.

Europe’s landmark anti-greenwash rulebook is reining in an industry that ballooned to more than $35 trillion last year. The Sustainable Finance Disclosure Regulation (SFDR) was enforced in March, but already in the lead-up to its arrival, European investment managers stripped the ESG label off $2 trillion in assets in anticipation of stricter rules.

Europe’s anti-greenwash rules contain some key sub-clauses that are forcing the asset management industry to substantiate their ESG claims. SFDR contains an Article 8 to define “light” green assets, and an Article 9 for “dark” green assets. The shade of green refers to the degree of importance accorded to ESG concerns. The EU is still working on more detailed descriptions of what the Articles may contain to stamp out any lingering mislabeling.

The adjustments sweeping through Europe’s asset management industry are beginning to make their way to the U.S., where ESG-labeled investment products this year surpassed those in Europe for the first time. Globally, ESG assets are on track to exceed $50 trillion by 2025, according to Bloomberg Intelligence.  

Individual investors choose options over stocks 

According to CBOE (Chicago Board Options Exchange) Global Markets data, nine of the 10 most active call-options trading days in history have taken place in 2021. Options Clearing Corp.’s figures show that almost 39 million option contracts have changed hands on an average day this year, up 31% from 2020 and the highest level since the market’s inception in 1973. 

So far this month, single-stock options with a notional value of roughly $6.9 trillion have changed hands, well above the $5.8 trillion in stocks that traded, according to Cboe data through September 22.
To date in 2021, the daily average notional value of traded single-stock options has exceeded $432 billion, compared with $404 billion of stocks, according to calculations by Cboe’s Henry Schwartz. Cboe’s data, which goes back to 2008, shows that this would be the first year on record that the value of options changing hands has surpassed that of stocks.   

Shortage of workers in U.K. 

BP Plc, the U.K.’s second-largest fuel retailer, said it’s shutting some of gas stations because of a nationwide truck driver shortage that’s threatening to derail the country’s economic recovery. Exxon Mobil Corp. also said that a “small number” of the 200 sites it operates for the supermarket Tesco Plc have been affected by the truck driver shortage. 
The shortage of drivers and other workers hamstrung the U.K. food industry earlier this year, with stores running low on basics like milk and bread, tens of thousands of extra pigs piling up on farms, and retailers warning that there will be shortages of some products at Christmas. 
The energy crisis has also ended up hammering the food industry. High gas prices last week forced fertilizer maker CF Industries Holding Inc. to close two plants that make carbon dioxide as a by-product. That posed an imminent threat to the food industry, which uses the gas to stun pigs and chickens for slaughter, as well as in packaging to extend shelf-life and the “dry ice” that keeps items frozen during delivery.   

The death of profit 

GFL Environmental Inc. went public in March 2020, and in the 18 months since, its share price on the Toronto Stock Exchange has almost doubled. The irony here is that GFL doesn’t make money. In fact, the company loses a lot of it. Over the past three fiscal years, GFL’s net losses have totaled $1.9-billion. It’s a common mindset lately. For all its hype, Uber Technologies Inc. has never made money – actually, it’s lost US$19-billion over the past five years. Streaming giant Spotify Technology SA has lost €2.6-billion ($3.8-billion) over the same period. There are now so many high-profile money-losers that Goldman Sachs recently created a Non-Profitable Technology Index, and its value soared when the pandemic hit. 

“The amount of capital out there has made it acceptable to lose money for a longer period of time, in the hopes that eventually you tip the market and become a near monopolist, or at least a duopoly,” says Martin Kenney, a professor at the University of California, Davis.

This week's interesting finds

Some profitable companies would still pay no taxes under Democrats’ plan

The Democratic proposal approved this month by the House Ways and Means Committee would sharply raise taxes on U.S. corporations, and business groups are working hard to defeat it. The legislation would increase the top corporate tax rate to 26.5% from 21%, and remove many benefits of booking profits in low-tax foreign countries.

The bill, however, doesn’t touch the main reasons why profitable companies sometimes don’t pay taxes, including accelerated depreciation of investments and tax credits for activities such as research and development.

The legislation also expands tax credits for clean energy and low-income housing in ways that could allow some companies to move from paying little to paying nothing.

The bill moving through Congress represents an explicit choice by Democrats to tolerate some zero-tax companies and steer tax advantages to companies that engage in favoured activities.

 

When the levee breaks…

To a man with a hammer, every problem looks like a nail. To the Federal Reserve, every problem is met with more liquidity. Unfortunately, the Fed has little control of where this liquidity goes. First, it went into equity markets, fueling an outright equity bubble. Then it overflowed into private equity and venture capital, creating demons there as well. Then it overflowed into “meme stonks” Not satisfied with the damage wrought on the financial economy, liquidity began overflowing into the real economy. There’s currently an epic housing bubble that’s leading to increasing wealth inequality and polarization.

Now, this liquidity is overflowing into the everyday economy—assuming you can even find the item you seek. In the past, only hard money zealots complained about the gradual creep of inflation—today, everyone feels it and has their own story. Everyone is painfully aware that inflation is present and likely to stay.

Could the bubble in duration assets (like high-multiple tech and Ponzi) finally be over? Could the bubble in inflation assets just be starting? Could the unwind of both historic extremes be unusually violent, as so much of the world’s capital is leaning the wrong direction? 

Climate change ETFs found to be undermining war on global warming

Climate-focused investment funds are undermining the fight against global warming by routinely engaging in greenwashing, academic research suggests. Worse still, these ETFs keep capital away from sectors that are actually at the heart of the transition to a cleaner economy.

“Since considerable investment is necessary to ensure electrification of the economy and decarbonisation of electricity, underfunding of this sector in climate-aligned benchmarks, which can correspond to a reduction in capital allocation of up to 91 per cent, would constitute the most dangerous form of portfolio greenwashing,” said Felix Goltz, co-author of Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing.

“The key issue is not how to restrict investment in these industries, but rather, how to make sure that these industries invest in technology that allows them to produce needed goods and services with minimum release of greenhouse gases,” he argued.

The findings come as investors have poured money into funds that claim to improve the world. The assets of self-proclaimed “sustainable” funds tripled between the end of 2018 and mid-2021 to $2.3 trillion, according to data from Morningstar.

Belize leans on coral reefs to drive bargain with bondholders

Belize is inching towards a deal with international bondholders after admitting it cannot afford to pay back its debt, and is counting on an unusual asset to help: its coral reefs.

Earlier this month the Caribbean nation, with its tourism-heavy economy ravaged by the pandemic, agreed to buy back its only international bond from investors at a huge discount, using cash lent by the Nature Conservancy, a US-based environmental group. As part of the deal, Belize will pre-fund a $23.4m endowment to support marine conservation projects on its coastline, home to the world’s second-largest barrier reef

If Belize can achieve the approval it needs on this $530 million bond, the country could secure the first green-tinged debt restructuring, capitalizing on the hunger among big fund managers to demonstrate their commitment to environmental, social and governance-driven investing.

Investors and advisers believe the agreement could serve as a template for future restructuring talks, in which cash-strapped nations use the promise of environmental conservation to drive a harder bargain — in effect creating a mechanism for investors in rich countries to pay poorer nations to protect the natural world.

Podcast: Dan Wang explains what China's tech crackdown is really all about

Over the last several months, Chinese authorities have undertaken a sweeping campaign of change. We've seen crackdowns on big tech and fintech companies (like Ant Financial and Didi), online education companies, and now even the playing of video games. Investors in key sectors have been clobbered by these new rules.  

This week's interesting finds

This week’s charts

Media usage trends

Trends in vehicle type purchases 

ICE (internal combustion engines) - traditional engines, powered by gasoline, diesel, biofuels or even natural gas

HEV (hybrid electric vehicles) - powered by a combination of an ICE and an electric motor 

BEV (battery electric vehicles) - no internal combustion engine or fuel tank at all and runs on a fully electric drivetrain powered by rechargeable batteries   

Europe’s energy crisis  

European power prices have spiraled to multi-year highs on a variety of factors in recent weeks, ranging from extremely strong commodity and carbon prices to low wind output. 

The October gas price at the Dutch TTF hub, a European benchmark, was seen to climb to a record high of 79 euros ($93.31) a megawatt-hour on Wednesday. The contract has risen more than 250% since January, according to Reuters, while benchmark power contracts in France and Germany have both doubled. 

Earlier this month, soaring gas prices and low wind output prompted the U.K. to fire up an old coal power plant to meet its electricity needs. 

“If there was enough wind, it could maybe meet more than half or two-thirds of U.K. power demand on a relatively low power demand day. But instead, what we are seeing is that actually we’ve got no wind and we are forced to fire up polluting coal-fired generation.”

Production wall setting us up for all-time high oil prices  

The world is hurtling towards an energy crisis, one in which the demand for oil, in my opinion, will grow for at least the next decade, yet the global oil supply chain can no longer adequately respond to it due to stringent environment, social and governance regulations and pressure from investors. 

How did we get here? Energy ignorance: the lack of knowledge of how oil is used, how critical it is to our daily lives, and the realistic timeline to replace it with a “renewable” alternative lie at the epicenter of the coming energy crisis. 

With the world’s population set to grow by another two billion people according to the United Nations by 2050, and oil alternatives such as hydrogen expected to take several decades to reach meaningful scale, once OPEC spare capacity gets exhausted by the end of 2022 and ESG pressures continue to disallow production growth from the equivalent of 40 per cent of global supply, I would posit the question: where exactly are incrementally necessary barrels going to come from in sufficient quantity in the years ahead to meet demand growth? 

This is our energy reality: the runway to displace oil as a transportation fuel is measured in decades while the ability to reduce oil consumption in non-travel related areas would require a meaningful reduction in the average person’s quality of living — a choice that will not be made willingly.

Digital retail businesses are betting on brick-and-mortar  

Retail darlings Warby Parker and Allbirds launched on the internet and paved the way for other brands to follow their playbooks and hope for similar success. The two businesses have become synonymous with the term “direct-to-consumer” in the retail industry. The strategy involves avoiding wholesale channels, such as department stores, to forge stronger relationships with customers. 

Now, they’re betting big on real estate — not the web — to fuel future growth. While opening up stores comes with added fixed costs, brick-and-mortar retail remains the best channel to find new customers. Warby Parker and Allbirds are betting on shops as they prepare to go public.

“There’s a certain phase of your infant growth where you can achieve success without stores, and it can be really easy to acquire customers,” Jason Goldberg said. “But no digitally native brand has achieved a billion dollars in annual revenue without a store. You need those stores as a cost-effective customer acquisition channel at some point.”

This week's interesting finds

This week’s charts

There have never been more job openings in the US before

Who has the real pricing power?

Investors willing to take on higher risk debt while losing money relative to inflation  

Investors in European junk bonds have begun accepting interest payments that are lower than eurozone inflation levels for the first time ever. Analysts said investors’ willingness to extend credit to the riskiest borrowers while losing money in real terms reflected the scarcity of other opportunities to earn returns in debt markets. 

Some investors may be inspired to buy junk bonds because they believe some issuers’ fortunes could improve to the point they would obtain investment-grade ratings.

Credit rating agencies have been upgrading bonds from junk status at an unusual rate with €7bn of European high-yield issues having been pushed up to investment grade in the past 12 months. This stands in contrast to the average €7bn worth of bonds that had been downgraded in each of the past five years, on average.

Equities and inflation  

This chart shows the correlation between the 12-month real equity return and the 12-month change in the inflation rate, for quintiles formed by the starting inflation rate. Only in the lowest quintile (starting inflation rate less than 1.0%) is the correlation positive at 0.4. In all other cases, there is a negative relationship between the real equity return and inflation changes, and more so for higher starting levels of inflation. The trend suggests that equities actually benefit from rising inflation if the starting level is low, but are hurt by rising inflation if it is above median (increased risk of inflation escalating).

The Case for a longer-term oil and gas bull market  

Back in mid-2020, folks were pronouncing the energy sector dead. Now, oil and gas companies in the US shale industry, and more broadly among publicly-traded independent oil companies, are on track to make record free cash flows in 2021: 

Historically for two centuries now, whenever humanity finds a better energy source, we add it onto the previous energy sources, rather than replace them. The previous energy sources remain flat or even continue to grow in absolute terms, while the new one grows faster and becomes more important: