So, If I had to put on 1 big 5yr + asset allocation trade here it would be PRIVATE EQUITY
into MACRO:
What I see more clearly every day is that so much of the Equity complex, from
Hedge Funds to ESG etc was and still is just lazy clustering around 50 or so names, effectively marking each others books up.
Has been Great on the way up, now will be Deadly on the unwind. I think its safe to assume that as redemptions pick up into year-end, so will the unwind.
Never forget that Valuations are still far higher in the private market than in much of the Public mkts. This raises again the obvious issue of when there is an “own up”? Anyone any creative thoughts on ways to short the leveraged loan index?!
As to where Nutstuff conviction remains highest, it remains in the Energy and alternatives
(nuclear etc but v little index weight or mkt cap) so its likes of Inependent Oil producers,
Offshore Drillers where I hear even more good news on Day rates, so names like VALARIS and NOBLE and Maersk Drilling in Europe should be largest positions.
I also want to bet on US Nat gas normalisation on price: RRC US! I feel happy about this for next 12mths + once the China political weather changes and demand returns and the hapless Vote chasing / Voter bribing headline chasing policies are seen to be as worthless as they always were.
The reality here is that so far the price of oil has not really increased at all since the invasion of the Ukraine. Oil is simply rising on the same trajectory that it was on prior to the invasion.
But that looks like it's about to change. I think we are finally about to experience an oil price shock. The Bar-bell approach remains clear especially if the Fed chokes (pulls back on it’s resolve to (stop the free drugs arguably make them cost something now and then close all the KFC’s!)
Money markets are still expecting another 175bp of Fed tightening by the end of 2022, though down from 200bp in early May. There is, in good friend Chris Woods view, “the best hope for a bond market rally now since the 10-year Treasury bond yield bottomed at 0.31% in March 2020.”
Nutstuff is adding to the “choke” trade. Thanks RM for work on how to do this! The
negative on the inflation front clearly remains that the ongoing Ukraine conflict has the potential to aggravate further the supply side pressures which are behind soaring food and energy prices.
If any progress here then that delta disappears but beyond headlines I worry little. While the
issues related to energy were well known even before the Russian invasion of Ukraine, the
impact on food and fertiliser prices has been dramatic since the launch of the conflict which
shows no sign of ending.
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