Macro ESG: markets, politics, and technology for a sustainable future with Greg Beier

Watch the US dollar. The dollar began selling off - quite literally - with the death of George Floyd (please see the earlier Macro ESG piece on that). The continued weakness in the USD appears to be less tied to risk-off dollars and risk-on equities than it is to people getting out of the US altogether and could presage a substantial move lower in equities.

Moreover, with the Treasury market dead (as in not a real market anymore), USD is only the meaningful market for a policy signal.

If the S&P500 and the Nasdaq sell off, and the dollar doesn’t rally – or if it only rallies a touch – and then resumes selling off – get flat US equity exposure, specifically, and then reduce the risk of markets that that trade with the US. www.macroESG.com #macroESG

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Long-Term Asia Ex-China Boom

In the 1990’s, there was Asia ex-Japan. In the 2020’s, there is Asia ex-China.

The next big wave of successful emerging markets investment will be in the nations bordering China: India, Pakistan, Afghanistan, Tajikistan, Kyrgyzstan, Kazakhstan, Mongolia, Russia, Vietnam, Laos, Myanmar, Bhutan and Nepal. I’d also add in Cambodia, Malaysia, and Thailand.

The countries around China will not boom because of the Belt and Road Initiative (which is going to fizzle out) but because of production leaving China after China’s mistaken grab of Hong Kong – hence, ending the China dream - which is pushing the developed world to realign away from China.

Long-Term Russian Boom

The Russian boom will be slower, more resource-based, and will expand to its neighbors of Norway, Finland, Estonia, Latvia, Lithuania, Belarus, Ukraine, Georgia, and Azerbaijan in Europe as well as Kazakhstan and Mongolia in Asia. It’s going to take time – there are decades of fear and misapprehension to throw off – but I suspect that Russia is ready to make peace with the West and integrate to the best extent that it can. www.macroESG.com #macroESG

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The ESG fund business is in the middle of a boom with a recent Barron’s cover and lots of positive talk in the financial press, but it will be short-lived.

When ESG funds outperformed non-ESG funds as stock markets and oil crashed from the pandemic this spring, the relative outperformance was because ESG funds had avoided oil and transportation (i.e., oil burning) stocks which all went down dramatically…. www.macroESG.com #macroESG

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As of June 30th, 2020, China has a 40.95% weight in MSCI EM USD index. China’s MSCI EM weight is greater than the bottom 23 countries, out of 26 total. As the world’s second largest economy in USD terms and largest in PPP terms, it doesn’t make sense to think of China as an emerging market anymore. Moreover, China could very well lose its emerging market status in the WTO.

MSCI has a key error in its index construction – it fails to account to account for macro ESG risks and has opened its clients up to potentially vast losses. China may be making improvements on the E front of ESG, but it has totally collapsed on the S and G of the Macro ESG view. www.macroESG.com #macroESG

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From an ESG perspective, what is most worrying about this change (which I have been fully expecting for years now) is that I can’t possibly see how there is going to be any meaningful cooperation between the West and China on Climate Change with all of the subterfuge going on. All environmental measures are about to get much worse as China is the world’s largest carbon emitter.

Cooperation with the West is going to end for the time being. In fact, it is the social and governance issues brought up by the end of Hong Kong that are going to make the environmental side so much more difficult. www.macroESG.com #macroESG

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The “ah-hah” moment that sparks a change in trend could be the return to schools in the US – which starts between mid-August to early September.

If that drives a surge of infections across the US that begin to appear in earnest by early to mid-October, that could be the catalyst to end the bull run – when schools are closed down. www.macroESG.com #macroESG

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The solution to Covid bears remarkable similarities to Volcker’s solution to inflation – you have to quickly slow the economy down. So, I’ve started to think of Covid as a new form of inflation because the cures to both ailments are so similar. www.macroESG.com #macroESG

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>> China is set to do well, but it’s not a Buffett buy it and hold it forever rally. Lots of dark clouds are gathering on the horizon for China’s growth.

>> Germany just threw in the towel on resisting QE - which to me is the start of the end of QE

>> Ray Dalio, “Central banks control the markets now” and "The capital markets drive the economy and the PE’s and the risk premiums more than the real economy drives the capital markets.”

>> Equities are on fire as fixed income has gone flat, but the pressure that is building up in the system will be expressed through currency changes.

>> Stay long equities, especially China, until the virus clearly threatens the ability of an economy to function and/or an economy is about to become engulfed in a trade / military war and/or domestic protests threaten investor / business confidence. www.macroESG.com #macroESG

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Macro ESG is back from break and thought that we would start with a review of the calls to date:

In How China and the EU Come Out on Top in the US versus Russia and Saudi Arabia Crude Oil Battle, the best call so far is long China. The Chinese equity market is on fire. And likely to make a big move higher. But it is a closed market and so is the currency. So, it’s really hard to say just exactly what this means to the global markets – it’s sort of living in its own little world, market speaking... www.macroESG.com #macroESG

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Yesterday, Macro ESG wrote, “China will be contained by a renewed US/EU alliance,” as one of the definitive themes of post Trump world.

Yesterday, Macro ESG also wrote, “Privacy rights, establishment of international norms,” as another theme of the post Trump world.

I learned today that both of these have already snapped into gear.

Macro ESG will be taking a brief publishing break and look forward to posting analysis again soon. www.macroESG.com #macroESG

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