I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Thursday Thinker, I share a smart idea or theory.
Eric Wallerstein, chief macro strategist for the Clocktower Group and formerly of the Fed, offered his macro shock framework on the most recent episode of the Forward Guidance podcast, and later on Twitter.
Here’s the framework:
Where are we right now? I suppose Synchronized Drawdown which includes the Hormuz closure and the AI infrastructure buildout, which are both global physical shocks. The Hormuz closure tightens oil, gas, and other materials supply (helium, fertilizer). The AI infrastructure buildout demands metals like copper, silver, gold, platinum, and more. It requires aluminum, lithium, cobalt, nickel, manganese, steel, concrete. There’s worldwide competition for these metals and materials, changing the landscape of which regions, industries, and commodities will do well and which will lag.
In this scenario, what does well? Let me unpack his “alpha window”:
- Short European Union equities and FX – sell or short European stocks and the Euro because Europe is highly dependent on global trade and imported energy. Europe lacks significant domestic energy production and relies on the Middle East for energy imports.
- Emerging market commodity exporters outperform – Lean towards Latin America for example (exports energy and metals), and away from Asia (import commodities and produce finished products).
- Commodity infrastructure – invest in the physical assets needed to move and store oil and natural gas including piplines, shpping terminals, and storage facilities. In a synchronized drawdown, these become strategic assets with pricing power.
- In the bond market, bet that interest rates in the EU and UK will fall as their central banks keep interest rates low or cut them to prevent an economic collapse. Meanwhile the US and emerging market exporters might have higher inflation, suggesting their rates will stay high or go up. “Receive” means to bet on lower rates in the weak economics and bet on higher rates in the economies likely to have higher inflation.
You might notice that U.S. stocks don’t appear much in this framework. That’s because they generally provide beta not alpha. Beta is how much the broad market goes up, the return you get simply by being in the market. Usually the S&P 500 index is taken to represent beta. Alpha is the edge you might get by doing something other than simply investing in an S&P 500 fund.
My moves
I was already making moves similar to what Wallerstein recommends:
- Trimming my broad international equity market exposure, both developed and emerging markets, in favor of Latin American ETFs ($ILF, $FLN, $EWZ, $EWW)
- Trimming my broad U.S. stock market exposure and instead leaning towards oil & gas plays, in the U.S. and also around the world ($XLE, $XOP, $IXC, $FCG)
- Adding to my oil & gas infrastructure position ($ENFR)
- Continuing to add to my gold positions ($IAU, $PHYS, $GDX)
- Holding my silver positions ($PHYS, $SILJ)
- Trimming my intermediate and long-term U.S. bond funds such as $TLT
And what about U.S. equity market exposure? S&P 500 has done poorly for a few months relative to international stocks, and I don’t expect anything to change for it over the next few. I’m leaning away from broad market indexes for U.S. stocks of any size (large cap, midcap, small cap) in order to focus my portfolio on the alpha plays outlined above.