Smarter Guys than Me
There are a few folks that I would put in the smart guy category. These are market participants that I assume have far greater knowledge and access to information than I do. And many of them have been tweeting about how supply chain issues resolving themselves.
Comments like this:
And I could add a bunch of others. In fact, there is a real drumbeat on fintwit that is downplaying whether the supply chain issues are passed.
I have been taking a cautious view for a while now. Not an ‘all cash’ view but more cautiously positioned. More bearish index positions, smaller sized longs, some energy longs, some inverse ETFs in China and shorts of SaaS companies (that maybe are reaching the point I should take them off) and shorts some other names sensitive to China.
If fintwit is right and supply chain issues are about to end then I probably need to reevaluate this.
I always assume I am the mark at the table. There are so many market participants that have greater access to data, greater resources and more insight than I do. If my own views are different from those I assume have greater knowledge, I want to start with the assumption that I’m wrong.
So let’s go over my position until now. My caution has been based on two legs.
First, whether China is going to slow considerably from a fallout of their property sector.
Second, whether energy supply issues are going to slow economies around the globe considerably.
There is a third leg – that we’ve gone so long without a decent correction – but that only really matters if one of the first two play out.
This is all about the second leg. Which really boils down to energy supply issues. How they impact manufacturing, prices and profits.
What I am surprised by is that so many are sure that these issues are in the rear view mirror?
Implicit in supply chain issues being behind us is that energy markets are about to heal. That oil and natural gas and coal prices are about to head back down.
Try as I might, I can’t quite see how we can know this.
I can see how it might be. Because to a large degree this is all weather-driven. If there is a warm winter across the board the problems go away and by the time the next winter hits the market could be much higher.
But how can we know what the winter holds? Particularly when it is not just one region but a whole bunch of regions that seem on the precipice of an energy crunch.
I just don’t know. I do know that if energy prices are about to slide and the supply chain heal then I’m probably not that well positioned. My energy stocks aren’t going to do well. And my SaaS shorts are going to go against me.
I’m not ready to do something about this yet. I’m not convinced I am wrong. But I am aware that people that are likely more knowledgeable than me are saying the opposite, so I better keep a very close eye on it.
I think oil and gas shortages (and especially gas) are more related to changes to industry dynamics than temporary Covid issues.
Lack of pipelines that blocks growth in 1/3 of US gas supply alone. Consolidation in the industry with only a handful of players having the inventory to even aggressively grow production and OPEC and shareholders sick of a lack of profits, creating a culture change towards generating high ROIC among O&G CEO’s (effectively increasing the marginal cost of supply). A decline in most US shale companies new well quality. And ESG of course ( although I think ESG is only a smallish component really).
Although I don’t think we will get massive shortages after the next few quarters, the set up for longer term higher US gas and oil prices seems to be here? And most energy equities are still priced like this will mostly be temporary.
The only overhang in all this is ofcourse China.
I took this (and various other comments I’ve seen around) to mean that it’s the commenters’ opinion we’ve hit “peak trouble” and will soon start on the downslope of COVID disruption. I know that markets are a discounting mechanism, but not every participant in them and in the real economy is forward-looking (by nature or by necessity), so I took these as a whole as more of an expression that the guinea pig is firmly in the python vs. the guinea pig has been digested. There are always a bunch of people rushing in early so they can say “I was right” (don’t think Mugatu is among them) whenever the turn is well and truly underway. I do think the Big Worry–China collapse+war with China–is a very good wall of worry to climb, tho.