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Weekly macro summary
There have also been quite a few interesting events to analyze, and below I list the most noteworthy news. Let's get started:
When we talk about the inevitable interest rate cut in the United States this year, the following graph is very illustrative in understanding the reasons: the Treasury faces a very significant wall of maturities in the next three years (38% of the total), which it will have to refinance at very high rates if it does not act to undo the restrictive monetary policy, and which would skyrocket the cost of state debt, which, combined with the large fiscal deficit, makes the situation unsustainable.
Adding to this is that 2024 is an election year, where economic prosperity and good stock market performance are not insignificant factors in the outcome of the elections, and it is true that on the market front the Biden administration has everything in its favor: the S&P rally surpasses, by far, what is seasonally expected. We will see if the trend continues or, at least, if the market manages to cling on to these gains for the remainder of the year.
Growth prospects are also good and have recently been revised upwards, unlike in Japan and the Eurozone, and despite barely reaching 2% (far from the world and Asia average), they meet the minimum to match reported inflation, leaving real growth at 0%. Neither hot nor cold.
Copper, despite the prevailing global macroeconomic weakness, appears to be one of the commodities with the best performance outlook for this year and the following ones. Although the landscape has improved significantly in the last two years, we can see how, since 2014, exploration and success in discoveries have been minimal, which, in an environment of increasing demand, outlines a market balance headed towards structural deficit.
In line with G&R's Q4 comment, it is important to study copper demand as a stock model, not a flow model, which paints a very positive picture for the case of China, which is one of the big unknowns right now: in the bullish scenario, just to support renewable energy plans, electrification, and residential improvements, the needs of the Asian giant would be 9.8Mt in the next 6 years. From the model portfolio, we have sought exposure formulas to this mega-trend with fairly limited downside and great optionality.
We are already seeing how from Beijing, which always has a longer-term and strategic vision, in anticipation of higher prices in the future, they have stockpiled inventories well above their current needs and historical average.
Cocoa prices have had a spectacular start to the year, with a 150% YTD appreciation, plunging them straight into a parabolic rise. In nominal terms, the price per ton has soared from $2,500/t a year ago to >$10,000/t, surpassing the old record of $5,500/t set 46 years ago.
The surge is not solely driven by speculative frenzy but is rooted in the fundamentals of supply and demand. Despite this price explosion, a deficit of 0.3Mt-0.5Mt is expected, which would be the largest figure in the last 65 years. 75% of the supply is concentrated in West Africa, where years of low investment, combined with adverse weather and a plague, have endangered the supply of this fruit.This spectacular rally in the basic input has a massive effect on the profitability and plans of chocolate manufacturers, which has very relevant inflationary implications (we are seeing a similar effect in other agricultural commodities, such as coffee) and an immediate impact on the Easter campaign, one of the key seasons for the industry. In fact, major chocolate manufacturers like Hershey or Mondelez have already warned that they will raise prices to protect their margins (we will see the effect on volumes, which already dropped nearly 4% last year) and reduce the weight of their products (shrinkflation).
As it always happens in every cycle, we are experiencing a wave of negative news in the crypto ecosystem, many of them antagonized by the SEC, which sees how the ETFs it approved so reluctantly have been the most successful in history. In this regard, the US regulator has filed a lawsuit against the KuCoin exchange for money laundering, and the country's justice system has dealt another blow with the conviction of Sam Bankman-Fried, founder of FTX, to 25 years in prison and a $11B fine for fraud. You win some, you lose some.
Before the significant supply shock that the halving will bring, the situation on exchanges is starting to become worrying, as there is a constant and accelerated drain (every day, institutional demand exceeds new supply by ~10x) and inventory coverage is rapidly declining.
After the heavy outflows of capital caused by Grayscale's exodus last week, investor appetite has returned strongly, resulting in average daily net capital inflows of +$200M.
On the other side of the ocean, on both sides, other countries/regions such as the United Kingdom and Hong Kong have already aproved the launch of their own versions of these ETFs, opening the door to a new giant wave of capital; among these, it is particularly noteworthy that in Hong Kong they will allow in-kind redemption, meaning that the sale of ETF shares can be exchanged for Bitcoin, making them a very interesting vehicle to avoid the hassle of custody for some segments of the population.
In an unfortunate accident, the Francis Scott Key Bridge in Baltimore collapsed after being struck by a container ship against one of its pillars. Beyond the human tragedy and the impact on a city already greatly affected and declining since the 1950s, the ramifications for the commodities market, specifically for coal, are significant.
The city's port, now blocked (expectedly for several months, while the passage is secured by removing the bridge debris and subsequently for its reconstruction), is a major export hub, with coal being the flagship product. Specifically, it is estimated that around ~2.5Mt (2%) will be affected, with the majority being thermal coal, and its main destination being India. While the volumes are not sufficient to cause a global impact, at the local level for the Asian country, it could pose a headache and disrupt or create new trade routes.
This week, we broke the streak of positive oil inventory reports: +3.165Mb of crude, +2.1Mb in Cushing, +1.29Mb of gasoline, and -1.18Mb of distillates. These are not bad figures for the lower demand season, but they slightly tarnish the trend we were experiencing. With these data, total inventories are down -2% YoY, while the price of WTI has increased by 12% over the same period.
In a recent survey, the Dallas FED asked shale producers from various basins what the incentive price is for developing new wells, and in the fastest-growing area, the Permian, the result was $70/b WTI, effectively setting a market floor.
It is also important to remember that production growth estimates assume an upward path on which doubts are already beginning to be projected, as they do not correspond to the trend observed in recent months; to add fuel to the fire, the Russian government has ordered its producers to cut production by 1Mb/d for June, to 9Mb/d, foreseeably in a strategy of indirect attack on the USA before the elections.
In a surprising move, after being so vocal last year about their intentions to fill the strategic reserve below $72/b WTI, the United States has purchased the latest batch of oil barrels above $80/b, which, in my opinion, indicates that, outside of the official discourse, their real view is that the oil market will be very tight this year and they prefer to buy at $80 now than at $90 later. In fact, there are already several voices beginning to float the idea of a three-digit crude oil price this year, as a wear-down strategy prior to the elections, coordinated by Russia and its allies in OPEC.
Model Portfolio
We are in a very late phase of the credit cycle, and we can find many proofs and examples of this in the market. Perhaps the most recent, albeit not the most surprising, is the one starring Nilam Resources this week. This company is a gold miner with very low capitalization assets in Peru ($10M), and on Monday announced its intention to acquire 24,800 BTCs (market value of $1.7B), which is, to say the least, surprising. The market, between blind and eager not to see, increased the price of $NILA shares by 22x in just one day, believing (wanting) it to be true and finding a new Microstrategy.
A day later, the CEO resigned, denouncing a pump and dump orchestrated by an employee of the company, who leaked this false information to the press, and the shares fell by 95%, returning to their previous price. Nothing new under the sun, and it is the plague that we must endure in every crypto bull cycle.
In the model portfolio, insulated from this noise, we've had another great week, and it seems like the pieces of the puzzle are falling into place for a very positive year. The model portfolio's return is +12.14% YTD compared to +9.93% for the S&P500, and +48.32% versus +31.31% for the S&P500 since inception (September 2022).
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