December 4, 2020,  Alex Rankine

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The green transition 

Why is supply constrained? Raw materials have been in a bear market for much of the last decade, explains a note by investment analyst Variant Perception. That caused energy firms and miners to slash exploration budgets. Soaring prices encourage more supply but it can take years to get a copper mine up and running, for example. The result is “prolonged periods” of “surging demand” running into “inelastic supply”. That generates a “commodity supercycle”. Add in their inflation-hedging potential and commodities looks “primed to deliver long-term superior returns”.

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November 29, 2020,  Cormac Lucey

London research provider Variant Perception believes we are on the cusp of a new commodity “super cycle”, that will result in commodity prices rising for several years to come after a long period in the doldrums. The report expects this reversal in the broad direction of commodity prices for several reasons.

Variant believes that the long dominance of monetary policy over fiscal policy is reversing and that this will cause a return of inflation risks not seen since the 1960s. The report warns that the private sector’s preference for saving — despite years of ever easier monetary policy — means that government must make up the shortfall by borrowing.

Across the world, this is now being supported by central banks buying government bonds. The pandemic has only magnified these trends and Variant feels we are heading towards “the fusion of monetary and fiscal policy”. It warns that this blurring of fiscal and monetary policy will create a very different investing environment, one in which normal and modest rises in inflation are more likely to trigger disorderly inflation hikes.

Variant believes that demand and supply imbalances drive the commodity cycle and that, while demand is set to pick up cyclically as economies recover, supply conditions remain cyclically tight. It warns that large commodity price spikes will become likely over the following 18 months after recovering demand runs into tight supply, and low inventories mean prices are more responsive to a demand pick-up.

On top of all that, Variant warns that investors are currently deeply underweight on commodities and may find themselves scrambling to acquire them in order to buy protection from rising inflation. It believes there is a risk of a huge supply-demand imbalance in commodity markets as investor preferences shift towards real assets. This could be the time to put some of your portfolio to work in deeply out-of-fashion sectors such as energy and metals.

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October 29, 2020,  John Authers

The Covid World Order

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China’s current strength could also help another beleaguered group of assets — industrial commodities. As the following chart from Variant Perception illustrates, China remains a massive source of demand for a range of raw materials, and its importance at the margin hasn’t diminished in the slightest over the last five years:

Does that mean that commodities might shine again, if China can keep up its pace? This chart from Variant Perception suggests there is a good chance. Commodity prices tend to move in long waves (and stocks tend to rise when commodities are falling and have difficulties during commodity bull markets). On that basis, it looks like this might be the time for another commodity bull market:

Industrial metals have recovered all their losses during the Covid spasm in March, they are up for the year, and have been relatively unscathed so far in this selloff. If there is anywhere logical to look for shelter in this environment, it might be in the cluster of assets, like the big industrial metals, that are most closely attached to China. That could be the new world order that the virus has wrought.

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October 29, 2020, MacroVoices

Erik Townsend and Patrick Ceresna welcome Tian Yang to MacroVoices. Erik and Tian discuss:

• Inflation driven commodity super cycle – when will it happen?
• When will  consumer price inflation starts?
• How to manage your portfolio to prepare for inflation
• COVID-19 pandemic impacts on prices
• How to position for commodity super cycle
• How to approach different commodity sectors for allocation
• Outlook on precious metals

Podcast Episode

October 21, 2020,  John Authers

From Hope, Fear and Covid Set Free

It’s not the despair, it’s the hope. Variant Perception has produced much interesting research over the last few months suggesting that panic over the coronavirus has been exaggerated. The research group’s latest bulletin argues that the greatest reason for fear is fear itself. Research from the International Monetary Fund shows that during the first 90 days of the pandemic, “voluntary social distancing”  had a greater impact on mobility than formal government lockdowns:

This suggests that the focus on mandatory lockdowns per se is overdone. There are exceptions, but as a rule people aren’t stupid. If there is a risk of catching a potentially deadly virus, they will modify their behavior. Further IMF charts show that a lockdown had far less effect on mobility than a doubling in coronavirus cases:

Not only that, but lifting a lockdown generally had a far more limited impact than imposing one. For all the passionate opposition they have sparked across the world, ending lockdowns hasn’t tended to have much effect on how people behave. This suggests that the virus itself, or at least the fear of it, is more impactful on the economy. That in turn leads Variant Perception to say that the prevailing negative coverage of Covid needs to be lightened:

As long as policymakers and the media present a more alarmist view of the virus’s impact than can be justified by a dispassionate analysis of the data, recoveries will continue to stutter. On the other hand, an easing of the fear portrayed would likely allow recoveries to accelerate at a much faster rate.

While this is true, the debate in the last few weeks has grown to include far more voices suggesting that we should move more freely, just as infections have risen again. Journalists need to be confident that it is responsible to tell people it’s safe to go back in the water. Otherwise the consequences become hard to contemplate.

Full Article

September 16, 2020,  John Authers

…the latest trade data suggest that the sudden stop caused by Covid-19 has intensified the imbalance between the world’s two biggest economies. Generally, most countries have seen imports and exports decrease by the same percentage, which means that their balances, whether positive or negative, have tightened. This is true of Canada, Japan, the U.K. and Germany, as Variant Perception illustrates below. But China and the U.S., whose balances had narrowed slightly during the Trump era, have bucked the trend., The Chinese trade surplus is widening, and the U.S. deficit is deepening:

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Meanwhile in the U.S., support for people idled by the Covid shutdown has translated into sharply higher personal incomes. Thus, for now, American policy has backed retail over industry, tending to pull in more imports, while China’s policy of boosting manufacturing rather than consumers has buoyed its exports:

If Americans truly want to avoid a trade deficit with China, then, this is a problem. (It’s not clear to me that the deficit as such should matter much, but evidently plenty of American politicians disagree.) The most likely way to see this change would also involve pain; if politicians cannot find a way to extend the benefits passed to aid people through the Covid slowdown, and the pandemic continues to slow activity, then there is likely to be much less consumer demand, which will feed through into lower imports. But this wouldn’t be a good solution, and indeed Variant Perception suggests that it would probably lead to yet more easy money from the Federal Reserve, which would suck in yet more imports.

Full Article

July 29, 2020,  John Authers

Summertime, and the Trading’s Not Easy….

August is almost upon us, and the northeastern U.S. is now uncomfortably, not to say disgustingly hot. Even if it is harder for people to escape on vacation this year than usual, it seems reasonable to expect markets to give us a dose of calm for the next few weeks.

Unfortunately, history suggests that Augusts aren’t always that sleepy. This chart, produced by Variant Perception with Bloomberg and Macrobond data, shows average monthly returns over the last 30 years for a range of assets.

August turns out to have been the best single month for the VIX volatility index and for the dollar, and the worst month for 10-year Treasury bonds (meaning yields tend to go up). It is also the best month after January for gold.Why so many fireworks amid the blue sky of summer?

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June 9th, 2020, John Authers

April 13, 2020, Jonathan Tepper

After a decade of economic growth and generous tax relief, US companies should have held cash piles to sustain them for short periods without revenue. But most borrowed all they could and never saved for a rainy day.

 

Today credit spreads are increasing, indicating a higher probability of default. However, the anomaly is not the current levels of stress but the unnatural calm that came before. Research by Variant Perception shows that, historically, companies with high levels of net debt compared with their cash flows have had higher costs of funding. But this relationship broke down after the last crisis. It is only now, during the coronavirus crisis, that fundamentals are reasserting themselves and terrible companies are seeing their spreads widen.

Full Article

March 23, 2020, Lev Borodovsky

8. Is recession risk fully priced in? According to Variant Perception, markets have often waited for tangible improvement to the underlying event that caused a sell-off before a tradable bottom occurs.

Full Article

January 22, 2020, Paul J Davies

Simon White, managing editor of research firm Variant Perception, expects spreads for both U.S. and European speculative-grade bonds to move slightly higher this year, although not as much as for investment-grade bonds.

“There are clear signs that the credit cycle is maturing,” Mr. White said.

“The fact is that investors are looking through the fundamentals, but central banks remain willing to support markets,” he said.

Full Article

October 31, 2019, Lev Borodovsky

The rise in the Variant Perception’s unemployment breadth index could signal higher volatility ahead.

Full Article

September 18, 2019

Simon White, co-founder of Variant Perception, explains his view that as interest rates approach the zero bound, conventional monetary policy tools do not achieve their intended goals, but instead create deflationary pressures. He argues that in a negative-rate world, the private sector increases savings rates to combat their lack of income – causing an even bigger deflationary push. White believes that conventional monetary policy is nearing its limits, and MMT will unleash a flurry of inflation as politicians take control of policy. Filmed on September 13, 2019 in London.