why ignoring the basics CAN prove painful.
This week, I am scheduled to undergo surgery on my nose, as I finally pay the price for some excessive risk-taking I engaged in on my mountain bike last summer.
It’s funny how quickly the rush you get navigating down a steep mountain slope is forgotten when you crash head first — and how long you have to live with the consequences.
It’s a lesson that seems lost on the markets these days, where there is no shortage of excessive risk-taking and ponzi-like euphoria, nowhere more so than in the cult-like clean-energy and ESG spaces that both retail and institutional investors can’t seem to get enough of. And don’t you dare question the fundamentals. When I noted on Twitter that “things will not end well” in connection to reports that Tesla made more money on its Bitcoin investment than its entire profit last year, the response was wild. My tweet had more than 584,000 impressions, 68,000 engagements and 187 comments, almost all of them negative in nature. Someone even left me a nasty voice mail at the office.
My fear is that those investors who are leaving their helmets at home and going “all-in” on stocks like Gamestop may be headed for something a lot worse than a broken nose, metaphorically speaking. In this high-risk environment, all it takes is for one part of the narrative to change and the next thing you know you’re lying in the er getting X-rayed to identify just how bad the damage is.
I personally think that worsening climate change paired with higher interest rates and inflation will be that rock or bump that derails those speculators riding these assets. Simply look at the tech carnage in 2000 and what followed as investors rotated into a mini commodity supercycle that itself burst in 2008, before crumbling in 2014 thanks to an oversupply response. Since then central banks, their low interest rates and quantitative easing have been very beneficial to the tech sector, which has used cheap capital and in some cases government subsidies to hasten the economy’s digital transformation while promising a cleaner future as well.
however, this time around, there is potential for a bigger commodity supercycle as the largest economies in the world are rapidly rolling out the vaccine in the hope of tapping into the trillions of dollars of pent-up household savings, itching to be spent.
Meanwhile, these governments are also opening the fiscal floodgates in a fashion that has never been done before, printing money to support these efforts.
This combination should be a huge benefit to cyclical sectors such as the financials and especially oil and gas stocks. For example, just last week we got a good look under the hood of the canadian banks via their earnings, which surprised most to the upside. Then there were the oil stocks, which got a huge boost as the narrative of a rapid transition to renewables experienced a hard dose of reality — with climate change, ironically, appearing to be the most likely catalyst.
Michigan Governor Gretchen Whitmer declared a state of energy emergency as the state experienced a shortage of propane during the massive cold spell that hit North America. It’s crazy to think that as early as last November, she wanted to shut down enbridge’s Line 5 which supplies 65 per cent of propane demand in the upper Peninsula, and 55 per cent of Michigan’s statewide propane requirements.
Then there were those with floating power rates in Texas being charged more than $2,000 per day as the price of electricity spiked from $50 to $9,000 per megawatt-hour. As reported in USA Today, wind power fell from providing 42 per cent of the state’s electricity to only 8 per cent when the cold front hit. Thankfully, natural gas plants did their part by boosting their output by more than 4.5 times.
We think these situations will only get worse especially as states like california are planning to move entirely to evs. unfortunately, the same organizations that are protesting pipelines are trying to stop the build-out of more transmission projects, which will be required if the state hopes to achieve its net zero carbon goal by 2050.
In conclusion, we think we are on the cusp of a reallocation or rebalancing back into the traditional bricks-and-mortar segments of the market as institutional managers look to protect their portfolios from inflation and climate change. A great example of this is Brookfield Infrastructure’s recent takeover offer for Inter-pipeline, which we think could be sending a strong signal of the merits of this strategy to other institutional investors.
One thing I’ve learned in both mountain biking and investing is to take a common-sense approach when thinking about future outcomes. rushing headlong down an idealistic path may feel good at first, but it is the quickest way to end up in a world of pain. Martin Pelletier, CFA, is a portfolio manager at Wellington-altus Private Counsel Inc. (formerly Trivest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.