JPMorgan’s Marko Kolanovic doesn’t obfuscate.
One hallmark of Kolanovic’s missives is a penchant for stating his position in straightforward terms. Sometimes, it’s almost deadpan. Deterministic, even.
Although he built a reputation for correctly predicting near-term market moves based on what, years later, became hot topics in the mainstream financial media (e.g., the behavior of vol-sensitive systematic strats and option hedging dynamics), one underappreciated aspect of Marko’s macro predictions is the extent to which they often play out almost to the letter, but on a maddening delay.
I say “maddening” because the elapsed time between a given prediction and realization is often long enough for critics to suggest he may “have it wrong this time” but not long enough for the old “being early is the same as being wrong” adage to apply. In other words, just when you think the window for being “right” is about to close, one of his predictions comes true.
That’s not, of course, to say he’s always right. Nobody’s always right. Even me, if you can believe it. But I can cite countless examples where he’s been correct — just in time.
Market participants are currently witnessing one of the most poignant such examples I can personally remember. Earlier this year, Kolanovic explicitly warned that the combination of underinvestment and surging demand could spark a full-on energy crisis. You can time stamp this one. On January 30, Marko wrote the following:
In a scenario of stronger post-COVID growth and inflationary pressures, energy needs could result in significant supply-demand frictions. Given the low level of new investing in traditional energy, and inability to quickly change the popular investment, ideological, and geopolitical paradigms, it is possible that a full-blown energy crisis of the western world could materialize with a potential to destabilize financial markets, economies, and more broadly societies.
It doesn’t get much more prescient than that. Fast forward nine months and the world is, in fact, experiencing a “full-blown energy crisis” as a result of the very same dynamics Marko cited just four weeks into 2021. European gas futures rose 60% over just two days this week, for example.
In a Wednesday note, Kolanovic wrote that although the crisis hasn’t yet “fully materialized,” “several signs of it are appearing such as coal, LNG and power prices reaching all-time highs, power rationing, blackouts and factory shutdowns occurring from China to Europe, and various supply chain issues surfacing from food processing, transport of goods, fuel deliveries, etc.”
Not surprisingly given his “COVID-green” energy crisis call from January, JPMorgan’s clients are now asking Marko what comes next. True to form, he captured the overall thrust of his outlook in the title, which read:
Buy the dip (ex high-multiple tech), markets would be fine with $130 oil and 250bp yields, coal: canary in a coal mine?
Again, the straightforward presentation admits of little in the way of ambiguity. For Marko, tech is just about the only thing you shouldn’t be buying on weakness, although he retained a preference for “energy (equities and commodity), materials, industrials and financials, and reopening, COVID-recovery, reflation and consumer themes.”
He noted the same systematic deleveraging documented in these pages as well as de-risking from discretionary managers over the last several weeks. “Systematic strategies decreased from ~75th to ~45th percentile, and hedge fund betas declined to historical average levels,” he wrote, adding that buying the dip in cyclical assets makes sense given “intensifying energy issues, rising inflation and bond yields, and still extreme overweights in growth and tech stocks, and underweights in value and cyclical stocks.”
Kolanovic doesn’t place all of the blame for the burgeoning energy crisis on green initiatives — not by a long shot. In fact, he sought Wednesday to distance his stance from one-dimensional assessments.
“Some clients are calling these developments collectively ‘Greenflation,’ indicating green policies are the only driver of the current woes, [but] we maintain these effects are not driven by a single cause, but by a more complex interplay of green energy policies, issues related to the onset and recovery from the COVID pandemic as well as several current geopolitical developments,” Kolanovic wrote.
Still, he called attempts to divert all blame from green policies “far-fetched.” The impact of green policies “can be explained in one sentence,” Marko said. Here’s that one sentence:
Given that a goal of the ESG/green initiative is to divert capital from fossil fuels development, affected companies will not have sufficient capital to provide needed supply, or will require significantly higher profits to clear the (higher) cost of capital hurdle.
Not to put too fine a point on it, but it’s impossible to argue with that.
On the bright side, Kolanovic doesn’t expect surging energy prices to deep-six the global economy or the consumer, both of which “function[ed] just fine in the period over 2010-15, when oil averaged above $100,” he remarked, adding that when you “adjust for inflation, consumer balance sheets, total oil expenditures, wages and prices of other assets (housing, stocks, etc.), we think even with oil at $130 or $150 equity markets and the economy could function well with some rebalancing and capital rotations.”
As for rate rise, Kolanovic said the threshold for a broad equity selloff on US 10s is at least 2.50% and possibly as high as 3%.
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