金融市場

Highlights China's high-profile jawboning draws attention to tightness in metals markets, and raises the odds the State Reserve Board (SRB) will release some of its massive copper and aluminum stockpiles in the near future. Over the medium- to long-term, the lack of major new greenfield capex raises red flags for the IEA's ambitious low-carbon pathway released last week, which foresees the need for a dramatic increase in renewable energy output and a halt in future oil and gas investment to achieve net-zero emissions by 2050. Copper demand is expected to exceed mined supply by 2028, according to an analysis by S&P, which, in line with our view, also sees refined-copper consumption exceeding production this year (Chart of the Week). A constitution re-write in Chile and elections in Peru threaten to usher in higher taxes and royalties on mining in these metals producers, placing future capex at risk. Chile's state-owned Codelco, the largest copper producer in the world, fears a bill to limit mining near glaciers could put as much as 40% of its copper production at risk. We remain bullish copper and look to get long on politically induced sell-offs as the USD weakens. Feature Politicians are inserting themselves in the metals markets' supply-demand evolutions to a greater degree than in the past, which is complicating the short- and medium-term analysis of prices. This adds to an already-difficult process of assessing markets, given the opacity of metals fundamentals – particularly inventories, which are notoriously difficult to assess. Chinese Communist Party (CCP) jawboning of market participants in iron ore, steel, copper and aluminum markets over the past two weeks has weakened prices, but, with the exception of steel rebar futures in Shanghai – down ~ 17% from recent highs, and now trading at ~ 4911 RMB/MT –  the other markets remain close to records.  Benchmark 62% Fe iron ore at the port of Tianjin was trading ~ 4% lower at $211/MT, while copper and aluminum were trading ~ 5.5% and 6.5% off their recent records at $4.535/lb and $2,350/MT, respectively. In addition to copper, aluminum markets are particularly tight (Chart 2). Jawboning aside, if fundamentals continue to keep prices elevated – or if we see a new leg up – China's high-profile jawboning could presage a release by the State Reserve Board (SRB) of some of its massive copper and aluminum stockpiles in the near term. In the case of copper, market guesses on the size of this stockpile are ~ 2mm to 2.7mm MT. On the aluminum side, Bloomberg reported CCP officials were considering the release of 500k MT to quell the market's demand for the metal. Chart of the WeekContinue Tightening In Copper Expected Chart 2Aluminum Remains Tight Brownfield Development Not Sufficient Our balances assessments continue to indicate key base metals markets are tight and will remain so over the short term (2-3 years). Economies ex-China are entering their post-COVID-19 recovery phase. This will be followed by higher demand from renewable generation and grid build-outs that will put them in direct competition with China for scarce metals supplies for decades to come. Markets will continue to tighten. In the bellwether copper market, we expect this tightness to remain a persistent feature of the market over the medium term – 3 to 5 years out – given the dearth of new supply coming to market. Copper prices are highly correlated with the other base metals (Chart 3) – the coefficient of correlation with the other base metals making up the LME's metals index is ~ 0.86 post-GFC – and provide a useful indicator of systematic trends in these markets. Chart 3Copper Correlation With LME Index Ex-Copper Copper ore quality has been falling for years, as miners focused on brownfield development to extend the life of mines (Chart 4). In Chart 5, we show the ratio of capex (in billion USD) to ore quality increases when capex growth is expanding faster than ore quality, and decreases when capex weakens and/or ore quality degradation is increasing. Chart 4Copper Capex, Ore Quality Declines Chart 5Capex-to-Ore-Quality Decline Set Market Up For Higher Prices Falling prices over the 2012-19 interval coincide with copper ore quality remaining on a downward trend, likely the result of previous higher prices that set off the capex boom pre-GFC. The lower prices favored brownfield over greenfield development. Goehring and Rozencwajg found in their analysis of 24 mines, about 80% of gross new reserves booked between 2001-2014 were due not to new mine discoveries but to companies reclassifying what was once considered to be waste-rock into minable reserves, lowering the cut-off grade for development.1 This is consistent with the most recent datapoints in Chart 5, due to falling ore grade values, as companies inject less capex into their operations and use it to expand on brownfield projects. Higher prices will be needed to incentivize more greenfield projects. A new report from S&P Global Market Intelligence shows copper reserves in the ground are falling along with new discoveries.2 According to the S&P analysts, copper demand is expected to exceed mined supply by 2028, which, in line with our view, sees refined-copper consumption exceeding production this year. Renewables Push At Risk Just last week, the IEA produced an ambitious and narrow path for governments to collectively reach a net-zero emissions (NZE) goal by 2050.3 Among its many recommendations, the IEA singled out the overhaul of the global electric grid, which will be required to accommodate the massive renewable-generation buildout the agency forecasts will be needed to achieve its NZE goals. The IEA forecasts annual investment in transmission and distribution grids will need to increase from $260 billion to $820 billion p.a. by 2030. This is easier said than done. Consider the build-out of China's grid, which is the largest grid in the world. To become carbon neutral by 2060, per its stated goals, investment in China’s grid and associated infrastructure is expected to approach ~ $900 billion, maybe more, over the next 5 years.4 The world’s largest fossil-fuel importer is looking to pivot away from coal and plans to more than double solar and wind power capacity to 1200 GW by 2030. Weening China off coal and rebuilding its grid to achieve these goals will be a herculean lift. It comes as no surprise that IEA member states have pushed back on the agency's NZE-by-2050 plan. This primarily is because of its requirement to completely halt fossil-fuel exploration and spending on new projects. Japan and Australia have pushed back against this plan, citing energy security concerns. Officials from both countries have stated that they will continue developing fossil fuel projects, as a back-up to renewables. Japan has been falling behind on renewable electricity generation (Chart 6). Expensive renewables and the unpopularity of nuclear fuel could make it harder for the world’s fifth largest fossil fuels consumer to move away from fossil fuels. Around the same time the IEA released its report, Australia committed $464 million to build a new gas-fired power station as a backup to renewables. Chart 6Japan Will Continue Building Fossil-Fuel Back-Up Generation Just days after the IEA report was published, the G7 nations agreed to stop overseas coal financing. This could have devastating effects for emerging and developing nations‘ electricity grids which are highly dependent on coal. In 2020 70% and 60% of India and China’s electricity respectively were produced by coal (Chart 7).5 Chart 7EM Economies Remain Reliant On Coal-Fired Generation Near-Term Copper Supply Risks Rise Even though inventories appear to be rebuilding, mounting political risks keep us bullish copper (Chart 8). Lawmakers in Chile and Peru are in the process of re-writing their constitutions to, among other things, raise royalties and taxes on mining activities in their respective countries. This could usher in higher taxes and royalties on mining for these metals producers, placing future capex at risk. In addition, Chile's state-owned Codelco, the largest copper producer in the world, fears a bill to limit mining near glaciers could put as much as 40% of its copper production at risk.6 None of these events is certain to occur. Peruvian elections, for one thing, are too close to call at this point, and Chile has a history of pro-business government. However, these are non-trivial odds – i.e., greater than Russian roulette odds of 1:6 – and if any or all of these outcomes are realized, higher costs in copper and lithium prices would result, and miners would have to pass those costs on to buyers. Bottom Line: We remain bullish base metals, especially copper. Another leg up in copper would pull base metals higher with it. We would look to get long on politically induced sell-offs, particularly with the USD weakening, as expected Chart 8Global Copper Inventories Rebuilding But Still Down Y/Y   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com     Commodities Round-Up Energy: Bullish Next Tuesday's OPEC 2.0 meeting appears to be a fairly staid affair, with little of the drama attending previous gatherings. Russian minister Novak observed the coalition would be jointly "calculating the balances" when it meets, taking into account the likely official return of Iran as an exporter, according to reuters.com. We expect a mid-year deal on allowing Iran to return to resume exports under the nuclear deal abrogated by the Trump administration in 2019, and reckon Iran has ~ 1.5mm b/d of production it can bring back on line, which likely would return its crude oil production to something above 3.8mm b/d by year-end. We are maintaining our forecast for Brent to average $64.45/bbl in 2H21; $75 and $78/bbl, in 2022 and 2023, respectively. By end 2023, prices trade to $80/bbl. Our forecast is premised on a wider global recovery going into 2H21, and continued production discipline from OPEC 2.0 (Chart 9). Base Metals: Bullish Our stop-losses was elected on our long Dec21 copper position on May 21, which means we closed the position with 48.2% return. The stop loss on our long 2022 vs short 2023 COMEX copper futures backwardation recommendation also was elected on May 20, leaving us with a return of 305%. We will be looking for an opportunity to re-establish these positions. Precious Metals: Bullish We expect the collapse in bitcoin prices, the US Fed’s decision to not raise interest rates, and a weakening US dollar to keep gold prices well bid (Chart 10). China’s ban on cryptocurrency services and Musk’s acknowledgment of the energy intensity of Bitcoin mining sent Bitcoin prices crashing. The Fed’s decision to keep interest rates constant, despite rising inflation and inflation expectations will reduce the opportunity cost of holding gold. According to our colleagues at USBS, the Fed will make its first interest rate hike only after the US economy has reached "maximum employment". The Job Openings and Labor Turnover Survey reported that job openings rose nearly 8% in March to 8.1 million jobs, however, overall hiring was little changed, rising by less than 4% to 6 million. As prices in the US rise and the dollar depreciates, gold will be favored as a store of value. On the back of these factors, we expect gold to hit $2,000/oz. Ags/Softs: Neutral Corn futures were trading close to 20% below recent highs earlier in the week at ~ $6.27/bu, on the back of much faster-than-expected plantings. Chart 9 Chart 10     Footnotes 1     Please refer to Goehring & Rozencwajg’s Q1 2021 market commentary. 2     Please see Copper cupboard remains bare as discoveries dwindle — S&P study published by mining.com 20 May 2021. 3    Please see Net Zero by 2050 – A Roadmap for the Global Energy Sector, published by the IEA. 4    Please see China’s climate goal: Overhauling its electricity grid, published by Aljazeera.  5    We discuss this in detail in Surging Metals Prices And The Case For Carbon-Capture published 13 May 2021, and Renewables ESG Risks Grow With Demand, which was published 29 April 2021.  Both are available at ces.bcaresearch.com. 6    Please see A game of chicken is clouding tax debate in top copper nation, Fujimori looks to speed up projects to tap copper riches in Peru and Codelco says 40% of its copper output at risk if glacier bill passes published by mining.com 24, 23 and 20 May 2021, respectively.    Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

特別レポート

Highlights We update our assumptions for the likely 10-15 year return for a wide range of different asset classes. Our methodology is basically unchanged from our last Return Assumptions report published in 2019, though we have refined our analysis and use of data in some areas. Returns over the next decade will be very low compared to history. We project that a standard global portfolio (50% equities, 30% bonds, and 20% alternatives) will return only 3.0% a year in nominal terms. That compares to a historic return of 6.3%. There are still some assets that will produce better returns, most notably small caps (4.9% a year in the US) and alternatives (6.2% for private equity, for example). But they also carry higher risk. Spreadsheets are available with detailed data. Introduction This is the third edition of our work on return assumptions. Since publishing the previous reports in November 2017 and June 2019, we have had many opportunities to discuss our methodologies with clients and in the Global Asset Allocation course at the BCA Academy. This has allowed us to test and, in many cases, refine our approach. We believe the methodologies we use have stood the test of time. We have always emphasized that this sort of capital markets assumptions (CMA) analysis is an art, not a precise science. We continue to prefer to project returns over a somewhat undefined 10-15 year period, since this allows us to think about the underlying trend of likely returns. Many other CMA papers use five (or even three) year time horizons which, in our view, are problematical since they rely heavily on a forecast of the timing, length, and severity of the next recession. Our approach is based on the concept that the return on the risk-free long-term government bond is the cornerstone to projecting asset returns, and that this return is rather predictable: It is approximately the current yield. Most other asset returns can be built up from that – the return on high-yield bonds, for example, by assuming that their historic spread over government bonds, and default and recovery rates will continue in the future. For equities, we continue to use six different methodologies, which are based on a mixture of valuation and projected earnings growth. This approach – that assumed returns can be built up from a combination of current yield plus forecast future growth in capital values – also works for most alternative asset classes, for example real estate. We have made a few minor changes to our methodology in this edition. We have, for example, made our use of historical data (for spreads, profit margins, growth relative to GDP, etc.) more consistent, using the 20-year average where possible. The biggest change this time is that clients can download here a spreadsheet with all the data in this report in order, for example, to use the data as inputs into their own optimizers. In addition, we have set up our detailed spreadsheet to allow clients to see the underlying inputs, the formulae behind our methodologies, and to input their own assumptions. This will also allow us to update the results of our analysis as often as needed. Please let us know here if you would like more details about this additional service. This Special Report is structured as follows. First, we analyze the overall results: What is the probable return from each asset class over the next 10-15 years, and how do these differ from historical returns. Next, we describe in detail the methodologies we use, for (1) economic growth, (2) fixed-income instruments, (3) equities, and (4) 12 different alternative asset classes. Then, we describe our way of forecasting currency returns, and show the return assumptions in different base currencies. Finally, we update the numbers for volatility and correlations, which many investors need as inputs into optimization programs. The summary of our results is shown in Table 1. The results are all average annual nominal total returns, in local currency terms (except for global indexes, which are in US dollars). The data is updated to end-April 2021 (except for some alternative asset classes where only quarterly data is available). Table 1BCA Assumed Returns Overall Results Returns over the coming decade are likely to be very disappointing compared to history. Our assumptions suggest a typical global portfolio, consisting of 50% large-cap equities, 30% bonds, and 20% alternatives, will produce an annual nominal return of only 3.0%, compared to an average of 6.3% over the past 20 years. A US-only portfolio with a similar composition is likely to produce only a 3.1% return, compared to 7% in history. The reason is simple: Valuations currently are very stretched in almost every asset class. The risk-free rate (the 10-year government bond yield) in the US is 1.6% (compared to a 20-year average of 3.1%). It is negative in the euro area (in nominal terms) and zero in Japan. These rates are the anchor for the returns of all other asset classes, which are theoretically priced off the risk-free rate plus a risk premium. We have long argued that valuations are not a good timing tool for investors. An asset can remain very expensive or very cheap for a considerable period. But all the evidence shows that the valuation at the starting point is a very powerful indicator of long-run returns. The yield on government bonds, for example, has a strong correlation with their 10-year return (Chart 1). In the equity market, the Shiller PE has historically had little correlation with the return over one or two years, but has a 90% correlation with the return over the subsequent 10 years (Chart 2). Chart 1Starting Yield Determines Bond Returns Chart 2Valuation Drive Long-Run Equtiy Returns     With valuations in equity markets now expensive relative to history (for example, forward PE for US stocks of 22x compared to a 20-year average of 16x, and 18x in the euro zone compared to 13x), investors should expect that equity market returns will be low relative to history. Our assumptions point to a 2.6% annual return from US stocks, 2.3% from the euro zone, and 1.6% from Japan (compared to 8.5%, 3.9%, and 3.5% over the past 20 years). Our assumptions are significantly lower than when we last published our analysis in 2019; then we projected 5.6% for US stocks, 4.7% for the euro zone, and 6.2% for Japan. The difference is that equity multiples have risen and risk-free rates have fallen significantly since then. So what should investors do? They have only two choices: Lower their return assumptions, or increase their weightings in riskier asset classes. Chart 3Hard To See How US Pension Funds Will Achieve Their Targets The average US public pension fund (Chart 3) still assumes a return of 7% a year, and private pension funds’ assumption is not much lower. And yet corporate pension funds have been pushed by their consultants in recent years to increase their weighting in bonds, to more closely match their liabilities (Chart 4). It is almost mathematically impossible to achieve their targets with that sort of portfolio. In other countries, such as Australia or Canada, pension funds’ return targets are typically inflation or cash plus 3-4 percentage points. But even those targets are challenging.   Chart 4...Especially With Over 50% In Bonds There are asset classes which will produce higher returns. For example, we project a return of 4.9% from US small-cap stocks – and 9.7% from UK small caps. US high-yield bonds should produce a return of 3.2% a year (even after defaults) and Emerging Markets local currency sovereign debt 2.7% (in USD terms) – not exactly exciting, but at least a pick-up over other fixed-income securities. The projected returns from illiquid alternative assets continue to look relatively attractive. An equal-weighted portfolio of the 12 alternatives we cover is projected to return 5.7% a year, not much lower than the forecast of 6.1% from our 2019 report (and compared to an average of 7.1% of the past 20 years). There are some alt assets where returns have started to trend down: Private equity, for instance, is projected to return 6.2% a year, compared to 11.1% in history, and hedge funds 4.5%, compared to 5.9%. But the illiquidity premium should not disappear completely, even if the move of alternative investments to become more mainstream has reduced it to a degree. So adding more risky assets to a portfolio is an answer, at least for those investors with a long enough time-horizon that allows them to bear the inevitable big drawdowns that come with having a more volatile portfolio. And, unfortunately, lower returns mean that the incremental return gained for each unit of risk taken has declined compared to the past 10 or 20 years (Chart 5) – the efficient frontier has flattened significantly. Chart 5You Need To Take More Risk To Produce Return How We Came Up With The Assumptions GDP Growth Several of our methodologies use assumptions (for example, in equity methods (2) and (3), based on projections of earnings growth, real-estate capital-value growth, and commodities prices) which require estimates of nominal GDP growth in each country and region. To make these forecasts, we assume that nominal GDP growth can be decomposed into: (1) growth of the working-age population, (2) productivity growth, and (3) inflation. This ignores capital intensity, but it has been relatively stable over history and is difficult to forecast. Table 2 shows the assumptions we use, and our forecasts for real and nominal GDP in each country and region. Table 2Calculations Of Trend GDP Growth For population growth we use the United Nations’ median forecast of annual growth in the population aged 25-54 between 2020 and 2040. This ranges from -1% in Japan to +1% in Emerging Markets – although note that the range of forecast population growth in EM varies widely from 1.2% in India to -1.1% in Korea (and in China, too, is negative at -0.7%). This estimate is reasonably reliable, although it does miss some possible factors, such as changes in the female participation rate, hours worked, and changing openness to immigration. Productivity is much harder to forecast. Over the past 10 to 20 years, productivity growth has trended down in most countries (Charts 6A & B). We take a slightly more optimistic view, assuming that productivity growth over the next 10-15 years will equal the 20-year average. We base this on the belief that part of the decline in productivity since the Global Financial Crisis is due to cyclical reasons which are now dissipating, and also to expectations that new technologies coming through (artificial intelligence, big data, automation, robotics etc) will boost productivity in the coming years. Others take a more pessimistic view. The Congressional Budget Office’s forecast of trend real US GDP growth in 2022-2031 of 1.8%, for example, is lower than our estimate of 2.2% mainly because of its more cautious estimate of productivity growth. Chart 6AProductivity Growth (I) Chart 6BProductivity Growth (II)   To derive nominal GDP growth, we assume that inflation over the next 10 years will be on average the same as over the past 20 years, for example 2% in the US, 1.6% in the euro area, 0.1% in Japan, and 3.9% in Emerging Markets (using a weighted average of EM by equity market cap). This estimate, too, has a high degree of uncertainty. One could imagine a scenario whereby inflation picks up significantly over the next decade due to excessively easy monetary policy, overly generous fiscal spending, growth in protectionism, rising labor pressure for wage increases, and the effects of a rising dependency ratio (the ratio of non-working people, especially retirees, to total population).1 But another scenario of continued “secular stagnation” and disinflation, caused by automation-driven job losses and a chronic lack of aggregate demand, is also conceivable. We think our middle-path forecast is the most sensible one to use in projecting likely asset returns, but investors might also want to plan based on these alternative scenarios too. Note that for Emerging Markets, we continue to show two different scenarios, which vary according to different projections of productivity growth. EM productivity growth has been declining steadily since around 2010, and in all major emerging economies, not just China. Our first scenario assumes that this decline ends and that, as in our assumption for developed economies, productivity growth reverts to the 20-year average. The more pessimistic (and, in our view, more likely) scenario assumes that the deterioration in productivity continues and that in 10 years’ time, EM productivity is the same as the average of developed economies. Which scenario will be correct depends on whether emerging economies, not least China, are able to implement structural reforms over the next decade, for example liberalizing the labor market, allowing a greater role for the private sector, improving corporate governance, and institutionalizing more orthodox fiscal and particularly monetary policy. Fixed Income Our anchor for calculating assumed returns is the return on long-term risk-free assets, specifically the 10-year government bond in the strongest countries. It is a reasonable assumption that an investor who buys, for example, a 10-year Treasury bond today and holds it for 10 years will make 1.6% a year in nominal US dollar terms. While this is not perfectly mathematically correct (since it ignores reinvested interest payments, for instance), empirically the return on government bonds has been very closely linked to the yield at the start-point in history (see Chart 1). From this starting-point in each country, we can easily build up the return for other fixed-income assets. These assumptions and the results are shown in Table 3. Table 3Fixed-Income Return Calculations Government bonds in most countries have an average duration of less than 10 years. Over the past five years, in the US it has averaged 6.4 years, and in the euro area 8.0 years. Only in the UK is the average over 10 years: 12.4 years to be precise. To calculate the return from the government bond index for each country we therefore assume that the shape of the yield curve (using the spread between 7-year and 10-year bonds) in future will be the same as the historic 20-year average. Cash. We assume that over the next 10 years the yield on cash will gradually revert to an equilibrium level. We calculate a market-implied real long-term neutral rate from the 10-year historical average of 5-year/5-year OIS implied forwards deflated by the 5-year/5-year implied CPI swap rate. This is a change from the methodology we used in 2019, when we based this off the neutral rate, r*, as calculated by the Holston Laubach-Williams model. But the New York Fed has temporarily stopped updating its calculation of this due to pandemic-induced volatility in the data, and anyway it was not available for every country. We turn the real cash rate into a total nominal return using our assumption for inflation described in detail in the GDP section above, the 20-year historical average of CPI. For inflation-linked securities, such as TIPS, we take the average yield over the past 10 years (a 20-year average was not available in many markets) and add the assumption for inflation described above. Corporate credit. We assume that spreads, and default and recovery rates, while highly volatile over the cycle, remain stable in the long run (Chart 7). We use 20-year averages for these, except that data for investment-grade default rates in Japan, the UK, Canada, and Australia are not available and so we use the average of the US and the euro zone. High-yield default rates are not available for the UK either, and so we do the same. Other bonds. For government-related debt (which is a big part of some bond indexes, 28% in the US for example) we assume that the 20-year historical average of the option-adjusted spread over government bonds will apply in the future too. We use the same methodology for securitized debt (for example, mortgage- and asset-based bonds): The 20-year average spread over the return on government bonds. Emerging Market debt. The assumptions and results for the three categories of EM debt (US dollar sovereign debt, US dollar corporate debt, and local currency sovereign debt) are shown in Table 4. We here assume that the 20-year average historical spread will continue in future. Default and recovery rates are a little harder to calculate, due to a lack of data. For USD sovereign debt (where defaults are rare and so hard to project), we use the rating-based default rate, calculated by Aswath Damodaran of NYU Stern School of Business.2 For USD-denominated EM corporate debt, we use the historical average, calculated by Moody's 2.5%.3 For local-currency debt, we use the same rating-based default rate as for USD sovereign debt. To translate the return into hard currency, we assume that currencies will move in line with the inflation differential between Emerging Markets and the US. For EM inflation we use an average of the IMF’s inflation forecasts for the nine largest emerging markets weighted by their weights in the J.P. Morgan GBI-EM Global Diversified local government bond index, and compare this to our US inflation forecast. This produces an EM inflation forecast of 2.9% a year, compared to 2.2% for the US, thus lowering the USD-based return from local EM debt by 0.7 percentage point. (See a more detailed discussion of forecasting long-term EM currency changes in the Currency section below). Index returns. Table 3 also shows the assumed return for the Bloomberg Barclays bond index for each country and for the global bond index, based on a weighted average of our assumption for each fixed-income asset class and country. Chart 7ACredit Spreads & Default Rates (I) Chart 7BCredit Spreads & Default Rates (II)   Table 4Emerging Market Debt   Equities The assumptions and detailed results for seven different equity markets are shown in Table 5. We have not made any substantial changes to our methodology for equities. We continue to use the average of six different methods to calculate the probable equity returns over the next 10-15 years. These are: Equity Risk Premium (ERP). The return from equities equals the yield on government bonds (we use 10-year bonds) plus an equity risk premium. For the US, we use an equity risk premium of 3.5%. This is based on work by Dimson, Marsh and Staunton4 showing that this is approximately the average excess return of equities over bonds in developed economies since 1900. We scale the equity risk premium for other countries using their average beta to the US market over the past 10 years. This varies from 0.66 for Japan (giving an ERP of 2.3%) and 1.2 in the euro area (ERP is 4.2%). Growth model. Here we assume that the return from equities equals the current dividend yield plus dividend growth. We need to adjust the dividend yield, however, to take into account that in some countries, particularly the US, it is more tax efficient for companies to do buybacks than to pay out dividends. We do this by adding equity withdrawals to the dividend yield. But this needs to be done on a net basis (taking into account equity issuance). We calculate this using the average annual change in the index divisor over the past 10 years. For the US, this is -0.8%, meaning there are more buybacks than new share issues. But in all other regions, the number is positive, and as high as 5.9% a year for Emerging Markets. This dilution is something that many calculations of assumed equity returns miss. For dividend growth, we assume that the dividend payout ratio remains stable, and that earnings growth is correlated with nominal GDP growth. However, history shows that earnings grow more slowly than GDP (logically so, when you consider that companies usually grow fastest before they list on a stock exchange). So we deduct 1% from nominal GDP growth to derive our earnings growth assumption. Note that for Emerging Markets, we use two different measures of dividend growth, depending on future productivity growth, as detailed above in our explanation of the GDP projections. Growth model (with reversion to mean). To take into account that valuations and profit margins typically revert to mean over the long run, we adjust the standard growth model (No. 2 above) by assuming that the current 12-month forward PE ratio and forward net profit margin for each country gradually revert over the next 10 years to their 20-year average. In the US, for example, that would mean that the current 12-month forward PE of 22.5x falls back to 16.0x, and profit margin of 12.5% falls to 10.7%. In every country and region, the profit margin is currently above the long-run average, and in all except the UK the PE is too. Note that we have changed from using the trailing PE and margin, because to use these now would be misleading given the big pandemic-driven decline in profits in 2020. Earnings yield. An intrinsically intuitive (and empirically demonstrable) way of estimating future returns is to use the earnings yield. This is based on the idea that an investor’s return from owning a stock comes either from the company paying a dividend, or from it investing retained earnings and paying a dividend in future. In the US, for example, a forward PE of 22.5x translates into an earnings yield of 4.4%. Again, here we switched this time to using 12-month forward forecast earnings yield, rather the trailing. Shiller PE. There is a strong correlation between valuation at the starting-point and the subsequent return from equities, at least over the long-run, although not over a period of less than 3-5 years (Chart 2). We regressed the Shiller PE (current price divided by average real earnings over the past 10 years) against the return from equities over the subsequent 10 years for each country and region. Composite valuation metric. The Shiller PE has its detractors. Using a fixed 10-year period does not reflect the different lengths of recessions and bull markets. It may say more about the mean-reverting nature of earnings than about whether the current price level is too high. So we also use the BCA Compositive Valuation Metric, which comprises eight indicators including, besides standard valuation measures such as price/sales and price/book, more esoteric ones such as market cap/GDP and Tobin’s Q. Again, we regress the metric against the subsequent 10-year return. Table 5Equity Return Calculations Alternative Assets Real Estate & REITs. We use the same basic methodology for both: The current yield (cap rate or dividend yield) plus projected capital value appreciation (linked to GDP growth). For US direct real estate, for example, we use the simple average cap rate of the five categories of commercial real estate (CRE), apartments, office, retail, industrial, and hotels in major cities: 6.1%. We also use the simple average of available city and category data for other countries. Cap rates are notoriously hard to estimate precisely; our data include a range of real estate, not just prime locations. We assume that capital values will grow in line with nominal GDP growth (using the same assumptions for this as we used for equities, 4.2%). We then deduct 0.5% for maintenance. This produces an expected return of 9.8% for the US. The only difference for REITs is that we do not deduct maintenance since this should already be reflected in the dividend yield. US REITs have a dividend yield currently of 3.5%, which produces an assumed return of 7.7% (Table 6). One risk with this methodology is that in the post-pandemic world, work and life practices might change. This will hurt office and residential real estate in major cities (which are overrepresented in investible CRE), though smaller cities and rural areas might benefit. As a result, capital values might fall. Table 6Alternatives Return Calculations Farmland & Timberland. Our methodology is similar to that for real estate: Current yield plus projected growth in capital values. For farmland, we use the farmland renter yield, sourced from the US Department of Agriculture. To estimate future land values, we take the gap between land value growth over the past 40 years (3.7%) and nominal growth of world GDP over that time (5.2%), assume that gap will continue and so deduct it from our estimate of global nominal GDP growth going forward (3.6%). This gives a result of 6.5%. For timberland, we assume that annualized returns in the future are the same as over the past 20 years. This produces a return assumption of 5.7%, which is (logically) moderately lower than our assumed return for farmland. Private Equity & Venture Capital. We project the return for private equity (PE) using the 30-year time-weighted average of the three-year rolling annualized return of PE over US large-cap equities, 3.6% (Chart 8). This produces an assumed return of 6.2%. For venture capital (VC), we use the same historical average for VC over PE (0.4%) to arrive at an assumed return of 6.6%. Hedge Funds. We use the 20-year time-weighted return of the Hedge Fund Composite Index over cash, 3.5% (Chart 9). This projects a future annual nominal return of 4.5%. Commodities. We previously used a methodology based on the idea that commodities’ bear markets in history have been rather fairly consistent, lasting on average 17 years, with an average decline of 50%, and that the current bear market began in 2012 (Chart 10). However, there are arguments that a new “commodities super-cycle” may be starting, driven by government infrastructure spending, and investment in alternative energy.5 We are agnostic for now on whether that will be the case, but it makes sense to switch to a neutral methodology, more in line with what we use for other assets classes: The return from commodities relative to GDP over the long run. Specifically, the CRB Raw Industrials Index has risen by an annualized 1.6% since 1951, during which time US nominal GDP growth averaged 6% (Chart 11). We assume that the differential will continue in future (although we calculate growth using global, not US, GDP), giving an annual return from commodities over the next 10-15 years of -0.9%. Gold. We calculate this using a regression of the gold price against nominal GDP growth and the annual change in the real 10-year yield over the past 40 years. For the forward-looking return assumption, we use a forecast of real rates (based on the equilibrium cash rate plus the average historical spread between the 10-year yield and cash) and a forecast of global nominal GDP growth. This produces an assumed return of 3.8%. Structured products. This asset class consists mainly of mortgage-backed and other asset-backed securitized instruments. In the US, these have historically returned 0.6% over US Treasurys. We assume that this premium continues, producing a total future return of 1.1% a year. Chart 8Private Equity Premium Chart 9Hedge Fund Return Over Cash     Chart 10Commodity Prices In History Chart 11Commodity Prices Vs. GDP Growth     Currencies Chart 12Currencies Tend To Revert To PPP To translate our local currency returns into an investor’s base currency, we need to arrive at some projections for FX movements over the next decade. Fortunately, for developed market currencies at least, it is relatively straightforward to use purchasing power parities (PPP) to do this since, over the long run, all the major currencies have tended to revert to PPP (Chart 12). We assume that in 10 years’ time all currencies will trade at PPP. We use the IMF’s estimate of today’s PPP for each currency to calculate the current under- or over-valuation. We assume that PPP will change in future years according to the relative inflation between each country and the US. The IMF provides five-year inflation forecasts and we assume that inflation will continue at this rate until 2031. For the euro zone, we calculate the PPP of the euro using the GDP-weighted PPPs of the five largest economies. The results (Table 7) suggest that the US dollar is currently overvalued and, given the forecast of higher inflation in the US than elsewhere in the future, will depreciate significantly against all major currencies except the Australian dollar. The USD is projected to depreciate by 1.7% a year against the euro and 1.1% against the yen over the next 10 years. It is likely to appreciate by 1.3% a year against the AUD, however. Table 7Currency Return Calculations Emerging Markets (Table 8) are more complicated. There is no evidence that EM currencies move towards PPP over time. All the major EM currencies are currently very cheap versus PPP (varying from 34% undervalued for the Chinese yuan to 67% for the Indonesian rupiah) but they were 10 years ago, too, and have not significantly moved towards PPP over that time. Table 8EM Currencies To calculate likely EM currency moves against the USD, therefore, we carry out a regression of the nine largest EM currencies against their relative CPI inflation rate to US inflation in history. We assume an intercept of zero. The regression coefficients vary from +0.5 for China to -1.7 for Malaysia. Apart from China, Malaysia, Poland and South Africa, the coefficients were negative, meaning that historically the USD has strengthened against the EM currency at least partly in line with relative inflation. To calculate likely future currency movements, we use the IMF’s five-year inflation forecasts and assume that the same rate of inflation will continue for our whole projection period. This methodology points to moderate annual depreciation of most EM currencies against the USD, varying from 0.8% a year for the Russian ruble to 0.1% for the Indonesia rupiah. The Chinese yuan and Taiwanese dollar are projected to appreciate moderately. We calculate the average EM currency movement using the weights of these nine large economies in the EM J.P. Morgan GBI-EM Global Diversified local-currency sovereign bond index. This produces a small (0.1%) a year appreciation. However, the IMF’s EM inflation forecasts may be too optimistic. It forecasts, for example, that Brazilian inflation will be only 3.3% a year in future, compared to an average of 6.1% over the past 20 years, and Russian inflation 4.0% versus a historical average of 9.3%. This suggests that EM currency performance could be worse than our projections. Table 9 shows the returns for the major asset classes expressed in local currency terms for six base currencies, based on the calculations explained above. Table 9Returns In Different Base Currencies Correlation And Volatility Below, in Table 10, we provide correlations for clients who need these inputs for their optimization calculations. Table 10Long-Run Correlation Matrix Returns can be calculated using the sort of forward-looking methodologies we have described above. For volatility, we think it is reasonable to use historical average data (Table 1, far right column), since volatility does not tend to trend over the long run (Chart 13). But correlation is a different matter. Correlations have varied significantly in history due to structural changes or regime shifts. The correlation of equities to bonds, it is well known, has moved from positive in the 1980s and 1990s, to negative since 2000 – probably because inflation disappeared as a factor moving bond prices (Chart 14). The correlation between equity market has risen as a result of the globalization of investment flows, though note that it fell back in 2010-2019. Chart 13Volatility Is Fairly Stable In The Long Run Chart 14Correlations Are Not Stable   So what correlations should investors use in an optimizer? Our recommendation would be to use the longest period of history available. A US investor, for example, might take the average correlation between Treasury bonds and large-cap US equities since 1945, 0.1%. Table 10 shows the correlation since 1973 of all the major asset classes for which data is available. Unfortunately, this misses some important asset classes such as high-yield bonds and Emerging Market equities, whose history does not go back that far. The results are intuitive – and prudent. From these numbers, it would seem sensible to use an assumption of a small positive correlation between US Treasurys and US equities, for example. US investment-grade debt has a correlation of 0.4 against equities. Global equity markets are all fairly highly correlated to each other, ranging mostly from 0.4 to 0.7. The most non-correlated asset class is commodities, especially gold.   Garry Evans, Senior Vice President Global Asset Allocation garry@bcaresearch.com   Amr Hanafy, Senior Analyst Global Asset Allocation amrh@bcaresearch.com   Footnotes 1 These are themes that BCA Research has been writing about for several years. See, for example, please see Global Investment Strategy, "1970s-Style Inflation: Could It Happen Again? (Part 1)," dated August 10, 2018; and " 1970s-Style Inflation: Could It Happen Again? (Part 2)," dated August 24, 2018. 2 Please see http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html 3 Annual Emerging Markets Default Study: Coronavirus Will Push Up Default Rates https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1214906 4 Please see, for example, https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/credit-suisse-global-investment-returns-yearbook-2021-summary-edition.pdf. 5 Please see Commodity & Energy Strategy, "Industrial Commodities Super-Cycle Or Bull Market?", dated March 4, 2021.

Dear client, In addition to this weekly report, we also sent you a Special Report on cryptocurrencies, authored by my colleagues Guy Russell and Matt Gertken. The conclusion is that government authorities are likely to lean against the proliferation of cryptocurrencies, something we suspected in our most recent report on the topic. Regards, Chester Highlights Net foreign inflows into US assets probably peaked in March. Meanwhile, there are strong reasons to believe outflows from US securities will accelerate in the coming months. As such, the 12-18-month outlook for the US dollar remains negative. Cryptocurrencies are correcting sharply amidst a crackdown in China, a risk we warned investors about in our Special Report last month. We are increasingly favoring the yen. Lower the limit-sell on USD/JPY to 109. Hold long CHF/NZD positions recommended last week. Feature Chart I-1Current Account Deficit = Capital Account Surplus The US runs a sizeable trade deficit. As such, it must import capital to finance this deficit (Chart I-1). Over the last year, this has been driven by equity and agency bond purchases by foreigners. However, we might be at the apex of a shift, where foreign appetite for US securities starts a meaningful decline. Financing The US Deficit TIC data is usually a lagging indicator for FX markets, but still holds valuable insights into foreign appetite for US assets. On this front, the March data was particularly instructive: There were strong inflows into US Treasury notes and bonds, to the tune of almost $120 bn. This was the greatest driver of monthly inflows. This was also the largest monthly increase since the global financial crisis. Net inflows into US equities stood at $32.2 bn in March. This is on par with the three-month average, but a sharp deceleration from December inflows of $78.3 bn. Corporate bonds commanded particularly strong inflows in March to the tune of $43.1 bn. It appears that foreign private concerns swapped their agency bond purchases with corporate bonds. US residents repatriated $54.1 bn back home in March. Official concerns were big buyers of long-term US Treasury bonds, but this was offset by a large sale of US T-bills. Net foreign official purchases of overall US securities were just $6.5 bn. With the dollar down since March, it is a fair assumption that the strong inflows we saw since then have somewhat reversed. The question going forward is whether there has been a regime shift in US purchases, specifically the purchase of equities (and agency bonds). And if so, can the purchase of US Treasurys pick up the slack (Chart I-2). Foreign inflows into the US equity market tend to be driven by expected rates of return, either from an expected rerating of the multiple or from profit growth. A rerating of the US equity multiple, relative to the rest of the world, has inversely tracked interest rates (Chart I-3). This is due to the higher weighting of defensive sectors in the US equity market. Concurrently, we showed in a recent report that profit growth on an aggregate level also tends to move in sync with relative economic momentum.1  Chart I-2Equity Inflows Have Financed ##br##The US Deficit Chart I-3Rising Bond Yields Would Curtail Equity Inflows If growth is rotating away from the US, and global bond yields still have upside, this will curtail foreign appetite for US equities. This appears to be the story since March, as non-US bourses have outperformed (Chart I-4). Chart I-4ANon-US Markets Are Bottoming Chart I-4BNon-US Markets Are Bottoming In terms of fixed income flows, the rise in US bond yields towards a peak of circa 180bps in March undoubtedly triggered strong inflows into the US Treasury market. Since then, yields outside the US have been moving somewhat higher, especially in Germany. This should curtail bond inflows, and also fits with a growth rotation away from the US. While foreign central banks were net buyers of US Treasurys in March, the “other reportables” category from the CFTC data show a huge short position in US 10-year futures. Foreign central banks are usually grouped in this category. This will suggest the accumulation of Treasurys should reverse in the coming months (Chart I-5). Chart I-5Did Central Banks Hedge Their March Purchases? A rotation of growth from the US towards other parts of the world would also make it more difficult to finance the US current account deficit. This is because it will compress real interest rate spreads between the US and the rest of the world. From a historical perspective, inflows into US Treasury assets only tend to accelerate when real rates in the US are at least 50-100 bps above that in other G10 economies (Chart I-6). That could explain why despite a positive Treasury-JGB spread of 165 basis points, Japanese investors were very much absent buyers in March (Chart I-7). Chart I-6Real Rate Differentials And Bond Capital Flows Chart I-7The Big Boys Did Not Buy Much Treasurys In March Critical to this view is the outlook for US inflation. On this front, we note the following: First, the output gap in the US should close faster than most other economies, at least according to the OECD (Chart I-8). Ceteris paribus, US inflation should outpace that in other countries in the near term and put downward pressure on real rates. Chart I-8The US Should Generate Higher Inflation Fiscal spending has been more pronounced in the US compared to other countries, which will further fan the inflationary flames. The Fed is the only central bank in the G10 committed to an inflation overshoot. In a nutshell, there is compelling evidence to suggest US inflows peaked in March from both foreign equity and bond investors. Upside surprises in inflation are more likely in the US in the very near term compared to other economies, which will depress real rates. Meanwhile, higher global yields are also a negative for the US equity market. There Is No Alternative Chart I-9A Deep And Liquid Pool Of Treasurys My colleague, Mathieu Savary, has made the case that there is no alternative to US Treasurys. The treasury market is the most liquid and the deepest safe haven pool in the capital market universe (Chart I-9). Ergo, a flight to safety will always bid up Treasurys, as we saw in March 2020. We do agree that Treasurys will continue to act as the world’s safe haven benchmark for now. However, that privilege is fraying at the edges, and it is the marginal changes that matter for dollar investors. Competition for safe haven assets continues to intensify as the narrative switches from 40 years of disinflationary forces to the rising prospect of an inflation overshoot. Inflation is anathema to fiat currencies, including the dollar. For investors, precious metals have been a preferred habitat for anti-fiat holdings. That said, cryptocurrencies are also rising in the ranks as an alternative. In our Special Report2 released a month ago, we suggested government regulation was a huge risk for cryptocurrencies. But more specifically, the degree to which cryptocurrencies can benefit from a shift away from dollars will depend on whether private investors or central banks drive the outflows. Since the peak in the DXY index in 2020, the biggest sellers of US Treasurys have been private investors. Cryptocurrencies benefited from this diversification. That has changed since March, which partly explains the big drawdown in crypto prices. In general, you always want to align yourself with strong buyers who are price indiscriminate. Foreign central banks (the biggest holders of US Treasurys) prefer gold as their anti-dollar asset. This puts an solid footing under gold prices, compared to cryptocurrencies or other anti-fiat assets. It is worth noting that competition between the dollar and gold often run in long cycles. In the 1970s, as inflation took hold in the US, the dollar depreciated and gold soared. In the 1980s, the dollar took off and gold fell sharply, as the Federal Reserve was able to bring down inflation. The 1990s were relatively disinflationary, which supported the dollar (Chart I-10). A whiff of rising inflation in the early 2000s hurt the dollar, while the 2010s were characterized by very low inflation, supporting the dollar. More recently, the dollar is weakening as inflationary trends accelerate faster in the US (Chart I-11). Chart I-10The Dollar And Inflation Move Opposite Ways (1) Chart I-11The Dollar And Inflation Move Opposite Ways (2) One of our favorite indicators for gauging ultimate downside in the dollar is the bond-to-gold ratio. The rationale is that the bond-to-gold ratio should capture investor preference at the margin for either US Treasurys or gold. This in turn has been a good measure of investor confidence in the greenback. On this basis, the bond-to-gold ratio (TLT-to-GLD ETF) is breaking down to fresh cycle lows (Chart I-12). This has historically pointed towards a lower US dollar. Chart I-12The Dollar And The Bond-To-Gold Ratio Within precious metals, we like gold but love silver. As such, we are short the gold-to-silver ratio since an entry point of 68. Our bias is that initial support for this ratio is 60. Meanwhile, we also like platinum, and will go long versus palladium at current levels. A Few Other Indicators A few other market developments are pointing to a lower dollar in the coming months. The dollar tends to decline in the second half of the year. This has been true since the 1970s (Chart I-13). Importantly, even during the Paul Volcker years in the 80s when the dollar staged a meaningful rally, it often fell in the second half of the year. The winner in the second half of the year has usually been the Swiss franc and the Japanese yen (Chart I-14).  Chart I-13The Dollar Usually Strengthens In H1 Chart I-14The Dollar Usually Weakens In H2 The OECD leading economic indicators still suggest US growth remains robust relative to the rest of the G10. However, our expectation is that this gap will decrease sharply in the second half of this year. That said, the current reading is a risk to our dollar bearish view (Chart I-15). Chart I-15US Exceptionalism Is A Risk For Dollar Bears Lumber has started to underperform Dr. Copper. Lumber benefits from solid US housing activity, while copper is more tied to global growth and the emerging investment in green technology. As a counter-cyclical currency, the dollar also tends to underperform higher beta currencies when lumber is underperforming copper (Chart I-16). The copper-to-gold ratio has also bottomed, suggesting ample liquidity is now fueling growth (Chart I-17). We suggested last week that the velocity of money across countries was a key variable to watch in getting the dollar call right. So far, the collapse in money velocity is least acute in China, explaining the rise in the copper-to-gold ratio and the improvement in non-US yields compared to the US. Chart I-16Lumber/Copper Prices And The Dollar Chart I-17Copper/Gold Prices And Bond Yields In summary, many cyclical indicators still point to a lower dollar. The key risk to this view is an equity market correction, and/or persistent relative strength in US growth.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Report, "Trading Currencies Using Equity Signals," dated May 7, 2021. 2 Please see Foreign Exchange Special Report, "Will Cryptocurrencies Displace Fiat," dated April 23, 2021. Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

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Highlights The selloff in crypto-currencies on May 19 may be overblown but the risk of government intervention is a rising headwind for this asset class. While environmental concerns are a threat to Bitcoin, the entire crypto-currency complex faces a looming confrontation over governance. Digital currencies are a natural evolution of money following coinage and paper. Moreover a sizable body of consumers is skeptical of governments and traditional banking. Loose monetary conditions are fueling a speculative mania. However, governments fought for centuries to gain a monopoly over money. As crypto-currencies become more popular, governments will step in to regulate and restrict them. Central bank digital currencies (CBDCs) threaten to remove the speed and transactional advantage of crypto-currencies, leaving privacy/anonymity as their main use-case. Feature The prefix “crypto” derives from the Greek kruptos or “hidden.” This etymology highlights one of the biggest problems confronting the crypto-currency craze in financial markets today. Speed and anonymity are the greatest assets of the digital tokens. But the former advantage is being eroded by competitors while the latter is becoming a political liability. In the 2020s, governments are growing stronger and more interventionist, not weaker and more laissez faire. Chart 1Loose Money Fuels Crypto Mania Bitcoin and rival crypto-currency Ethereum fell by 29.5% and 43.2% in intra-day trading on May 19, only to finish the day down by 13.8% and 27.2%, respectively. The market panicked on news that China’s central bank had banned firms from handling transactions in crypto-currencies. What really happened was that China’s National Internet Finance Association, China Banking Association, and Payment and Clearing Association issued a statement merely reiterating a 2013 and 2017 policy that already banned firms from handling transactions in crypto-currencies. These three institutions also warned about financial speculation regarding crypto-currencies.1 The crypto market suffered a spike in volatility because it is in the midst of a speculative mania. In the last five years, total market capitalization of crypto-currencies has risen from around $7 billion to $2.3 trillion,2 recording a 34,000% gain. Some crypto-currencies have even recorded returns in excess of that number over a shorter horizon. Price gains have been driven by retail buyers who may or may not know much about this new asset class (Chart 1). Prior to the May 19 selloff, prices had grown overextended and recent concerns over the environment, sustainability, and governance (ESG) had shaken confidence in Bitcoin and its peers. Chinese authorities have already banned financial firms from providing crypto services in a bid to deter ownership of crypto-currencies. And China is not alone. The latest market jitters are a warning sign that government interference in the crypto-currency market is a real threat. Regulation and sovereign-issued digital currencies are starting to enter the fray. While ultra-dovish central bank policies are not changing soon, and therefore crypto-currency price bubbles can continue to grow, crypto-currencies will remain subject to extreme volatility and precipitous crashes. In this report we argue that the fundamental problem with crypto-currencies is that they threaten the economic sovereignty of nation-states. Environmental degradation, financial instability, and black market crime, and other concerns about cryptos have varying degrees of merit. But they provide governments with ample motivation to pursue a much deeper interest in regulating a technological innovation that has the power to undermine state influence over the economy and society. Government scrutiny is a legitimate reason for crypto buyers to turn sellers. Does The World Need Crypto-Currencies? Broadly speaking, there are two primary justifications for crypto-currencies, centered on a transactional basis: speed and privacy/anonymity. The crux of crypto-currency creation rests on these two use cases.3 The speed of crypto-currencies comes from their ability to increase efficiency in local and global payment systems by facilitating financial transactions without the need of a third party (e.g. a financial institution). Cross-border settlement of traditional (fiat) currency transactions processed through the standard SWIFT communications system takes up to two business days. Most transactions involving crypto-currencies over a blockchain network are realized in less than an hour, cross-border or not.4 The fees involved with third-party payments are often more expensive than transacting with crypto-currencies. Simply put, excluding the “middleman” can save money. This is a selling point in a global market that expects to see retail cross-border transactions reach $3.5 trillion by the end of 2021, of which up to 5% are associated with transaction-based fees.5 But this breakthrough in payment system technology can be overstated and is not the main reason for using crypto-currency. Speculation drives current use, especially given that there is speculative behavior even among those who believe that cryptos are safe-haven assets or promising long-term investments (Chart 2). Chart 2Crypto-Currency Use Driven By Speculation Chart 3Consumers Growing Skeptical Of Banking Regulation If a person wants to buy an item from a company in a distant country, that person could use a crypto-currency just as he or she could use a credit card. Both parties would have a secure medium of exchange but, unlike with a credit card, both would avoid using fiat currencies. Neither party could conduct the same transaction using gold or silver. The crucial premise is the existence of an online community of individuals and firms who for one reason or another want to avoid fiat currencies. From a descriptive point of view, the crypto-currency phenomenon implies a lack of trust in modern governments, or at least their monetary systems, and an assertion of individual property rights. The list of crypto-currencies continues to grow. To date, there are approximately 9,800 of them. Some are trying to prove their economic value or use, while others have been created with no intended purpose or problem to solve. Even so, there has yet to be a crypto-currency that overwhelms the use of slower fiat money. In a recent Special Report, BCA Research’s Foreign Exchange Strategist Chester Ntonifor showed that crypto-currencies still have a long way to go to have a chance at replacing fiat monies. While crypto-currencies are showing signs of significant improvement as mediums of exchange, they still fall short as stores of value and units of account. The other primary case for crypto-currencies is privacy or anonymity. The bypassing of intermediaries implies a greater control of funds by the two parties of a transaction. Crypto-currencies are said to be more “private” compared to fiat money. Fiat money is controlled by governments and banks while crypto-currencies have only “owners.” Crypto-currencies are anonymous because they are stored in digital wallets with alphanumeric sequences – there is a limited personal data trail that follows crypto-currency compared to those of electronic fiat currency transactions. In a post-9/11, post-GFC, post-COVID world where a sizable body of consumers is growing more skeptical of government surveillance and regulation and banking industry practices (Chart 3), crypto-currencies give users more than just a means to transact with. However, privacy is not the same as security. Hacking and fraud can affect cryptos as well as other forms of money and attacks will increase with the value of the currencies. Bitcoin At The Helm Of Crypto-Currency Market Chart 4Bitcoin Slows Bitcoin has cemented its status as the number one currency in the crypto-verse.6 It is considered to be the first crypto-currency created, it is the most widely accepted, it is touted as a store of value or “digital gold,” and it is the most featured in quoting alternative crypto-currency pairs across crypto exchanges. As it stands, Bitcoin accounts for around 42% of total crypto-currency market capitalization.7 This share has declined from around 65% at the start of 2021 on the back of the frenzied rise of several alternative coins.8 But rising risks to Bitcoin’s standing will cause the entire crypto-market to retreat. In a Special Report penned in February, BCA Research’s Chief Global Strategist Peter Berezin argued that Bitcoin is more of a trend than a solution and that its usefulness is diminishing. Bitcoin’s transaction speed is slowing and its transaction cost is rising (Chart 4). Slowing speed and rising cost on the Bitcoin network are linked to a scalability problem. The crypto-currency’s network has a limited rate at which it can process transactions related to the fact that records (or “blocks”) in the Bitcoin blockchain are limited in size and frequency. This means that one of its fundamental justifications, transactional speed, will become less attractive over time, should the network not address these issues. Bitcoin also consumes a significant amount of energy, a controversy that is gaining traction in the crypto-currency market after Elon Musk, the “techno-king” of Tesla, cited environmental concerns in reversing his decision to accept Bitcoin payment for his company’s electric vehicles. Energy consumption rises as more coins are mined, since mining each new Bitcoin becomes more computer-power intensive. The need for computing power and energy will continue to increase until all 21 million Bitcoins (total supply) are mined, which is currently estimated to occur by the year 2140. Strikingly, the energy needed to mine Bitcoin over a year are comparable to a small country’s annual power consumption, such as Sweden or Argentina (Chart 5). Chart 5Bitcoin Consumes More Energy Than A Small Country … Bitcoin also generates significant quantities of electronic waste (Chart 6). Chart 6… And Generates A Lot Of Electronic Waste Bitcoin mining is heavily domiciled in China, which accounts for 65% of global mining activity (Figure 1). China’s energy mix is dominated by coal power, which makes up approximately 65% of the country’s total energy mix even after a decade of aggressive state-led efforts to reduce coal reliance. Of this, coal powered energy makes up approximately 60% of Bitcoin’s energy mix in China.9 With several countries aiming to minimize carbon emissions, and with approximately 60% of Bitcoin mining powered by coal-fired energy globally,10 Bitcoin imposes a major negative environmental impact. Figure 1Bitcoin Mining Well Anchored In Asia Bitcoin does not shape up well when compared to gold’s energy intensity either. Bitcoin mining now consumes more energy than gold mining over a single year. While the energy difference is not large, the economic value is. Gold’s energy consumption to economic value trade-off is lower than that of Bitcoin. The production value of gold in 2020 was close to $200 billion, while Bitcoin was measured at less than $25 billion (Chart 7A). On a one-to-one basis, gold even has a lower carbon footprint than Bitcoin (Chart 7B). Chart 7AGold Outshines Bitcoin On Production Value And Carbon Footprint Chart 7BGold Outshines Bitcoin On Production Value And Carbon Footprint Crypto-currency energy consumption and carbon footprint will attract the attention of government regulators. Of course, not all crypto-currencies are heavy polluters. But if the supply of cryptos is constrained by mining difficulties then they will require a lot of energy. If the supply is not constrained then the price will be low. Government Regulation Is Coming Environmental concerns point to the single greatest threat to crypto-currencies – the Leviathan, i.e. the state. In this sense the crypto market’s wild fluctuations on May 19, at the mere whiff of tougher Chinese regulation, are a sign of what is to come. Governments around the world have so far left crypto-currencies largely unregulated but this laissez-faire attitude is already changing. Environmental regulation has already been mentioned. Governments will also be eager to expand their regulatory powers to “protect” consumers, businesses, and banks from extreme volatility in crypto markets. But investors will underrate the regulatory threat if they focus on these issues. At the most basic level, governments around the world will not sit idly by and lose what could become significant control of their monetary systems. The ability to establish and control legal tender is a critical part of economic sovereignty. Governments won control of the printing press over centuries and will not cede that control lightly. If crypto-currencies are adopted widely, then finance ministries and central banks will lose their ability to manipulate the money supply and the general level of prices effectively. Politicians will lose the ability to stimulate the economy or keep inflation in check. Most importantly, while one may view such threats as overblown, it is governments, not other organizations, that will make the critical judgment on whether crypto-currencies threaten their sovereignty. Throughout the world, most crypto-currency exchanges are regulated to prevent money laundering. Crypto-currencies are not legal tender and, aside from Bitcoin, their use is mostly banned in China (Table 1). However, more specialized regulation that targets energy and economic use has yet to be brought into law across the world. Table 1World Governments Will Not Relinquish Hard-Fought Monopolies Over Money Supply In China, initial coin offerings (ICOs – the equivalent of an initial public offering on the stock market) and trading platforms are banned from engaging in exchanges between the yuan and crypto-currencies or tokens. In fact, China recognizes crypto-currencies only as virtual commodities or virtual property. India is another country where exchanges and ICOs are banned. While crypto-currencies are not banned, they are not legal tender. Indian policymakers have recently proposed banning crypto-currencies, however. The proposed legislation is one of the world’s strictest policies against crypto-currencies. It would criminalize possession, issuance, mining, trading, and transferring crypto-assets. If the ban becomes law, India would be the first major economy to make holding crypto-currency illegal. Even China, which has banned mining and trading, does not penalize possession. In the US, Secretary of the Treasury Janet Yellen has already expressed concerns regarding the illicit use of cryptos for supposed criminal gain.11 She is in alignment with European Central Bank President Christine Lagarde. Because of the anonymity of crypto-currencies, identifying users behind illicit transactions is difficult. This means regulators face headwinds in identifying transactions that are made for criminal gain, as compared to fiat transactions. Governments have long dealt with the anonymity of cash but they have ways of monitoring bank accounts and paper bills. Crypto-currencies are beyond their immediate sight of control and therefore will attract growing scrutiny and legislative action in this regard. The Colonial Pipeline ransomware attack on May 7, which temporarily shuttered about 45% of the fuel supply line for the eastern United States, illustrates the point. The DarkSide group of hackers who orchestrated the attack demanded a ransom payment of $4.4 million worth of Bitcoin, which Colonial Pipeline paid them on May 7. Shortly thereafter, unspecified “law enforcement agencies” clawed back the $4.4 million from the hackers’ account (transferring it to an unknown address) and DarkSide lost access to its payment server, DOS servers, and blog. This episode should not be underrated. It was a successful, large-scale cyber-attack on critical infrastructure in the world’s most powerful country. It highlighted the illicit uses to which crypto-currencies can be put. True, criminals demand ransoms in fiat money as well – and many crypto-currency operators will distance themselves from the criminal underworld. Nevertheless governments will give little slack to an emerging technology that presents big new law enforcement challenges and is not widely used by the general public. Ultimately governments will pursue their sovereign interests in controlling money, the economy, and trade, listening to their banking lobby, expanding their remit to “protect” consumers, and cracking down on illicit activity. Governments are not capable of abolishing crypto-currencies altogether, or the underlying technology of blockchain. But they will play a large and growing role in regulating them. Central Banks Advancing On Digital Currencies Central bank digital currencies (CBDCs) will leave crypto-currencies in the realm of speculative assets. CBDCs are a form of digital money denominated in a country’s national unit of account and represent a liability on a central bank’s balance sheet. This is different from current e-money that represents a claim on a private financial institution’s balance sheet. It is also different from crypto-currencies, because there is a central authority behind a CBDC, unlike with crypto-currencies due to their decentralized nature. In China, the People’s Bank of China (PBoC) has suggested its rollout of a digital yuan is “ready” despite no release to date. Beta testing is ongoing in several provinces. The PBoC’s justification for a digital yuan comes from China’s growing cashless economy. The transition away from cash is largely thanks to mobile payment platforms like Alibaba’s Alipay and Tencent’s WeChat Pay, which, between the two of them, control almost the entire mobile payments market of some 850 million users. There is a significant amount of systemic risk in this system – one reason why Chinese authorities have recently subjected these companies to new scrutiny and regulation. Should Alibaba or Tencent go bankrupt, the local payment system will crash. The PBoC’s efforts will increase competition in the local payments space and reduce this systemic risk. Policymakers are also concerned that as Chinese citizens choose to hold their money in digital wallets provided by Alibaba and Tencent instead of bank accounts, liquidity is being drained from the traditional banking system, putting deposit levels at banks under strain, and posing risks to liability matching. The digital yuan will still involve a third party, unlike crypto-currencies which do not. Doing away with commercial banks is not a reality – indeed the Chinese Communist Party seeks to buttress the state-owned commercial banks in order to maintain control of the economy. What the digital yuan does, and other CBDCs will do too, is utilize blockchain technology, which is faster and more secure than traditional payment networks. In the US, the Fed has been studying the viability of a CBDC US dollar. The Fed has stated that it is carefully exploring whether a CBDC will lead to “safer, less expensive, faster, or otherwise more efficient payments.” While the Fed has yet to find a single standout case for a CBDC US Dollar, Fed Chair Jerome Powell said last year that the US has a “competitive payments market” with “fast and cheap services, particularly in comparison to other nations exploring a CBDC.” To date, the Fed’s observation is that many of the challenges that CBDCs hope to address do not apply to the US, including disuse of physical cash, narrow reach or high concentration of banking, and weak infrastructure for payment systems. Rather, the Fed is more focused on developing the FedNow real-time payment system for private banks. This is much the same as in Europe, where physical cash still plays a major role in day-to-day economic activity and where local payment systems are fast and secure. But central banks around the world continue to engage in work centered around CBDCs (Charts 8A and 8B) – and China’s progress will encourage others to move faster. Advanced economies are mostly interested in creating a safer and more efficient payment system, while emerging and developed economies have interest across several areas such as financial stability, monetary policy setting, and inclusiveness of banking, as well as efficiency and safety (Chart 9). CBDCs are especially attractive to emerging market policy makers at targeting those who lack access to traditional banking. Chart 8ACentral Banks Advancing On CBDC Work Chart 8BCentral Banks Advancing On CBDC Work Chart 9Central Banks CBDC Interest Areas In remote areas, access to banking is scarce and expensive. CBDCs can help solve this problem. Individuals would have CBDC accounts directly on a central bank ledger. They could then access their money and transact through a digital wallet application that is linked to the CBDC account. Giving people access to digital currency would allow them to transact quickly, in remote settings, without the need of hard currency. Monetary policy transmission is also better in advanced economies. In emerging markets, there are bottlenecks in local financial markets. Looser central monetary policy does not always translate into cheaper financing across the economy. In remote and poverty stricken areas, monetary policy transmission is sticky, meaning high costs of borrowing can persist even through accommodative policy cycles. This is a smaller issue in advanced economies. Payment systems in advanced economies are due an overhaul in security and efficiency, and CBDCs and blockchain technology will provide this. CBDCs will prove to be just as efficient to transact with as any crypto-currencies available today. CBDCs will also be legal tender and accepted by all vendors. The anonymity factor will be lost but this will not be a problem for most users (whereas legal issues will become a problem for crypto-currencies). The probability of central banks issuing CBDCs in both the short and medium term, both in the retail and wholesale space, is rising. If advanced economies like those of the G7 issue CBDCs soon, policy makers will undoubtedly ensure the use of it over the currently circulating and partially accepted crypto-currencies. The endgame will leave crypto-currencies in the highly speculative asset class, perhaps even in the black market where anonymity is valued for transactions that wish not to be tracked. Investment Takeaways Prices of crypto-currencies may continue to rise given sky-high fiat money creation amid the COVID pandemic and ultra-low interest rates. Digitalization is the natural next step in the evolution of money from precious metals to paper banknotes to electronic coin. But the market leader, Bitcoin, is encountering more headwinds. The primary case for the use of Bitcoin is challenged due to slowing transaction speeds and rising transaction costs. The virtual currency is primarily mined using coal-powered energy, resulting in growing scrutiny from governments and consumers. Government regulation is entering the ring and policymakers will take an increasingly heavy-handed role in trying to ensure that cryptos do not undermine economic sovereignty, financial stability, and law and order. When central banks begin to rollout digital currencies, especially those domiciled in advanced economies, crypto-currencies as medium of exchange will lose much of their allure. Crypto-currencies will remain as anti-fiat currencies and speculative assets. Risks To The View Given the controversy surrounding crypto-currencies, it is only fair to state outright the risks to our view. We would also recommend clients read our colleague Dhaval Joshi’s latest bullish take on Bitcoin. First, scaling up Bitcoin’s network and processing transactions in batches instead of single transactions will resolve transaction time and cost risks, restoring efficiency. This is a clear solution to efficiency concerns. However, scaling and batching transactions are not on the immediate horizon of Bitcoin developers. Bitcoin’s network will still need to undergo another “halving” in order for this risk to subside and for the network to scale. A halving of the network will only occur again in 2024.12 Second, on the environment: Bitcoin mining is not solely dependent on fossil fuel energy that gives it a “dirty” footprint. Renewables already make up some 25% of Bitcoin mining. Increasing the use of renewables in Bitcoin’s energy mix will help lower its environmental impact. However, this is easier said than done. Global renewable energy has yet to scale up to a point where it can consistently out-supply existing fossil-fuel energy. Mining hardware also has its associated carbon footprint that would need to be addressed. And location matters too. Crypto-currency mining farms are large-scale projects. Simply uprooting operations to a country that could lower the carbon footprint of a mining farm or two is not viable due to the costs involved. Hence crypto-currency mining will probably continue to be a “dirty” operation but a rapid shift to renewables would challenge our thesis. Bitcoin’s network is also based off a “proof of work” protocol. Miners must prove that a certain amount of computational effort has been expended for confirming blocks on the network, allowing transactions to be processed. Proof of work is energy intensive. Other crypto-currencies, like Ethereum, will adopt a “proof of stake” protocol. Simply put, transactions are confirmed by users and their stake in the associated crypto-currency. Proof of stake is less energy intensive compared to proof of work. Third, as to government regulation, the longer policymakers take to enact legislation targeting crypto-currencies, the larger their market will grow. Regulation in China and India may set a benchmark for major economies but not all will follow in the Asian giants’ footsteps. Some governments have been slow to study crypto-currencies, meaning legislation aimed at governing or regulating them may still be long in coming. Innovation is a good thing and free economies will not wish to restrain crypto-currencies or blockchain technology unduly, for fear of missing out. Fourth, on CBDCs, some central banks may only adopt them based on their respective economic needs. However, rising crypto-currency populism drives associated economic risks which can force the hands of central banks to adopt CBDCs in lieu of said needs. Each country faces unique challenges. Some central banks may not want to be left behind even if they believe their policy framework is facilitating economic activity efficiently. While the Fed has stated that it will not adopt a CBDC for the primary reason of ensuring payment security since it believes it already has a safe system in place, this view will change. The Fed could justify a move to a CBDC US dollar on the single basis of transitioning to a more sophisticated technology for the future. The Fed will not want to be caught behind the curve considering the PBoC is priming its digital yuan for release soon. Technological leadership is a strategic imperative of the United States and that imperative applies to financial technology as well as other areas.   Guy Russell Research Analyst GuyR@bcaresearch.com Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com Footnotes 1 Muyao Shen, “China Reiterates Crypto Bans From 2013 and 2017”, coindesk, May 18, 2021, coindesk.com. 2 As of May 11, 2021. 3 There are several other reasons or “problems” that crypto-currencies are created for or to solve, but speed and privacy form the basis of crypto-currencies first coming into existence. 4 Not all crypto-currencies transact in less than an hour. But there are many that transact in several minutes and in some cases, mere seconds. As the leading crypto-currency, Bitcoin takes approximately one hour for a transaction to be fully verified over its network. 5 “McKinsey’s Global Banking Annual Review”, McKinsey, Dec. 9, 2020, mckinsey.com. 6 We use Bitcoin as an example to understand the risk and impact of forthcoming government regulation and competition. Because of Bitcoin’s status, any significant risks that threaten the crypto-currency’s standing as the number one currency will threaten the entire market. 7 As of May 20, 2021. Figure varies daily. See www.coinmarketcap.com for more information. 8 Alternative currencies such as Ethereum, Ripple, Binance Coin, Dogecoin, and Cardano have chipped away at Bitcoin’s crypto-market dominance through 2021. 9 According to The Center For Alternative Finance, The University Of Cambridge. 10 According to The Center For Alternative Finance, The University Of Cambridge. 11 Data on the use of crypto-currencies for illicit activitiessays otherwise. Of all crypto-currency transactions, it is estimated that only 2.1% are used for illicit activities. See “2021 Crypto Crime Report”, Chainalysis, chainalysis.com. 12 A Bitcoin halving is when the reward for mining Bitcoin transactions is cut in half. This event also cuts Bitcoin's inflation rate and the rate at which new Bitcoins enter circulation, in half. Bitcoin last halved on May 11, 2020.

Highlights The drubbing that cryptocurrencies have received over the past two weeks is just a taste of things to come. Crypto markets will continue to face tighter regulation, as this week’s announcements from China and the US Treasury underscore. The hope that cryptocurrencies can ever truly “go green” is wishful thinking. Given their decentralized nature, cryptocurrencies require real resources to be expended to permit secure transactions to take place. In addition to their technical limitations, cryptocurrencies face a fundamental constraint, which we dub the “Crypto Impossibility Theorem.” The Crypto Impossibility Theorem states that cryptocurrencies will be viable only if they offer a higher return than equities. The assumption that cryptos can generate a return in excess of equities is almost certain to be false since it would require that cryptocurrency holdings rise more quickly than income in perpetuity. In the near term, the pain in crypto markets could drag down other speculative assets such as tech stocks. In the long term, diminished investor interest in cryptos will benefit the stock market, as investor attention focuses back on equities. Cryptos: Can’t Have It All Investors who track the cryptocurrency market might be aware of the “blockchain trilemma.” It posits that cryptocurrencies can possess only two of the following three attributes: decentralization, security, and scalability. Bitcoin is both highly decentralized and reasonably secure. However, because control of the Bitcoin blockchain is distributed across thousands of individual computer nodes, it is also very slow. The Bitcoin network can barely process five transactions per second, compared to over 20,000 for the Visa network (Chart 1). The average fee for a Bitcoin transaction is around $30, a number that has risen over the past few years (Chart 2). Chart 1Speed Of Transactions, Or Lack Thereof Chart 2Rising Cost Per Transaction   The elaborate puzzles that the Bitcoin algorithm must solve to verify transactions are extremely energy intensive. Bitcoin mining consumes more energy than entire countries such as Sweden, Argentina, and Pakistan (Chart 3). About two-thirds of Bitcoin mining currently takes place in China, often using electricity generated by burning coal. Chart 3Bitcoin And Ethereum: How Dare You! Some claim that Bitcoin and other cryptocurrencies are shifting to renewable energy sources, a trend that will continue in the years ahead. However, this argument misses the point, which is that the “proof of work” mechanism that underpins Bitcoin requires that real resources be expended. Suppose that all Bitcoin mining could be performed entirely for free using solar energy. This would reduce the cost of running a “mining rig,” incentivizing more mining. The Bitcoin algorithm operates in such a way that the difficulty of mining coins increases as the total computational power of all miners grows. In this computational rat race, miners would need to purchase more servers with ever more powerful specifications to keep up with their competitors. And semiconductors do not grow on trees. It takes real resources to produce them. As this recent Bloomberg article pointed out, Taiwan Semiconductor generates almost 50% more greenhouse emissions than General Motors. Like Bitcoin, Ethereum uses the “proof of work” mechanism to verify transactions. There have been active discussions to shift Ethereum to a “proof of stake” mechanism, which would greatly expedite transactions.1 However, some have argued that a proof of stake system would degrade security, allowing for “double-spend attacks” where someone transfers coins to someone else but then spends the coins before the transaction is completed. The Crypto Impossibility Theorem We will not delve any further into the technical nature of the blockchain trilemma other than to note that it poses a serious challenge to the entire cryptocurrency project. Instead, let us highlight another obstacle that has received less attention – one that could be even more damaging for the prospects of cryptocurrencies in the long run. Let us hyperbolically call it the “Crypto Impossibility Theorem.” The Crypto Impossibility Theorem states that a cryptocurrency will be viable only if it offers a higher return than equities. As we discuss below, the assumption that cryptos can generate a return in excess of equities is almost certain to be false since it would require that cryptocurrency holdings rise more quickly than income in perpetuity. This implies that the value that investors currently attach to cryptos will turn out to be illusory. To see the theorem in action, recall that money serves three functions: As a unit of account, as a medium of exchange, and as a store of value. It is doubtful that anyone seriously thinks that the price tag on a box of cereal will ever be displayed in units of Bitcoin, ether, or any of the various dog coins currently in vogue. Thus, we can scratch “unit of account” off the list of possible crypto uses. What about medium of exchange? One can imagine a scenario where the prices of goods and services are still listed in dollars, but one may transfer the equivalent in cryptocurrencies to purchase them. However, this raises an obvious question: Why would anyone choose to hold a cryptocurrency if wages and prices are denominated in fiat currencies such as US dollars or euros? The only possible answer is that people must see cryptocurrencies as fulfilling the third function of money, namely being a store of value. Would people be willing to hold cryptocurrencies if their prices generally moved sideways? It is doubtful. Cryptocurrencies are risky. Cryptocurrency accounts are not subject to deposit insurance. Crypto prices are also extremely volatile. During the pandemic, the S&P 500 fell by 34%, but the price of Bitcoin sank by an even greater 53%. Other cryptocurrencies fared even worse. In contrast, the trade-weighted US dollar strengthened by about 4% while gold prices only fell marginally (Chart 4). Thus, to incentivize people to hold cryptos, the prospective capital gain has to be large enough to offset the inherent volatility in owning these currencies. Chart 4Cryptocurrencies Fared Badly During Last Year’s Equity Sell-Off This is where the Crypto Impossibility Theorem comes in. Unlike dividend-paying stocks, cryptocurrencies do not provide any income to their holders. Thus, even if cryptos were just as risky as stocks, the price of cryptos would still need to rise more than the price of stocks in order to ensure that investors remain indifferent between the two asset classes. In practice, as the experience of the pandemic demonstrates, cryptos are even riskier than stocks. Thus, the expected return on cryptos has to exceed the expected increase in stock prices by more than the dividend yield. The problem for crypto holders is that this is not mathematically possible. Even if one controls for the rise in price-earnings multiples over time, equity returns have generally exceeded nominal GDP growth (Table 1). Hence, if cryptos need to offer superior returns to equities, and if the return on equities is at least equal to nominal GDP growth, then the market capitalization of cryptocurrencies will not only end up rising faster than for stocks, it will rise faster than aggregate national income. In a digital world where people need ever-less money to facilitate transactions, there is no good reason to expect this to happen. Table 1Equity Returns And GDP Growth A Fashion Choice Crypto-optimists might argue that the required rate of return to holding cryptos will decline as the market matures. This is wishful thinking. Equities derive their value from the fundamentals of a company’s business. In contrast, cryptocurrencies have no intrinsic value. Their value is whatever others are willing to pay for them. Not only does this make cryptocurrencies inherently more risky than equities, it also makes them highly susceptible to fashion trends. It is not surprising that many upstart cryptocurrencies have crafted ties with celebrities and other “influencers.” The whole point is to get enough people interested in a cryptocurrency to generate a feedback loop of wider adoption, thus allowing the currency’s early backers to cash out. The drubbing that cryptocurrencies have received over the past two weeks is just a taste of things to come. In this sense, cryptocurrencies are even more vulnerable to affinity scams than other assets such as precious metals. While apocalyptic warnings of “currency debasement” have long been used to sell bullion, at least with gold and silver, you truly do get something that is in short supply. In the case of cryptocurrencies, while the supply of any individual cryptocurrency may be limited, the overall supply is unbounded. This means that the average price of each currency is likely to rise much less than the aggregate value of all cryptocurrencies, making the entire asset class even less viable over time.   Cryptogeddon The drubbing that cryptocurrencies have received over the past two weeks is just a taste of things to come. As Matt Gertken and Guy Russell discuss in this week’s Geopolitical Strategy report, crypto markets will continue to face tighter regulation (Table 2). Just this week, China reiterated its ban on financial companies offering cryptocurrency services. As part of its broader effort to crack down on tax evasion, the US Treasury Department also announced that it will require any cryptocurrency transfer worth $10,000 or more to be reported to the IRS. Table 2Regulation Of Cryptos: What Can And Cannot Be Done The blockchain trilemma will make it impossible for cryptos to overcome ESG concerns, while the Crypto Impossibility Theorem will prevent cryptocurrencies from ever being stable stores of value. In the meantime, an ebbing of input price inflation will take some of the wind out of the sails from the argument that cryptos are an indispensable hedge against the “inevitable” debasement of fiat monies. Chart 5 shows that DRAM prices have rolled over. Lumber prices have dropped 11% so far this week. Corn, soybean, and steel prices have also backed off their highs. Cryptos are like sharks; they need to move forward or they will sink. Back when they were unknown to most investors, a speculative case could have been made for buying cryptos. However, that case vanished earlier this year when the aggregate value of cryptocurrencies briefly surpassed the entire stock of US dollars in circulation (Chart 6). Even with the recent correction, there are 17 cryptocurrencies with market capitalizations above $10 billion (Table 3). Chart 5To The Moon And Back? Chart 6Aggregate Value Of Cryptos Briefly Surpassed The Entire Stock Of US Dollars In Circulation Table 3Close To 20 Cryptos Have A Market Cap In Excess Of US$10bn What will the ongoing crypto collapse mean for the broader investment landscape? In the near term, the pain in crypto markets could drag down other speculative assets such as tech stocks. In the long term, diminished investor interest in cryptos will benefit the stock market, as investor attention focuses back on equities. For the broader economy, the impact of a crypto bear market will be limited. The banking system has very little exposure to cryptos. There will be a modest adverse wealth effect from falling crypto prices. However, the inability of a few laser-eyed crypto traders to buy their Lambos is hardly going to matter much against the backdrop of strong stimulus-fueled consumption growth in the US and a number of other economies. Investors should continue to overweight stocks in a global asset portfolio, favoring value over growth, cyclicals over defensives, and non-US stocks over their US peers. Peter Berezin Chief Global Strategist pberezin@bcaresearch.com Footnotes 1 Proof of Work (PoW) and Proof of Stake (PoS) are two methods used to ensure the integrity of a coin’s ledger or record of transactions. PoW achieves this by requiring miners (those who add transactions to the ledger) to solve a time-consuming mathematical puzzle. PoS achieves this through a different mechanism, where anyone who stakes their own coin can be randomly selected to add new transactions to the ledger. Those holding or “staking” more coin have a higher probability of being selected. Global Investment Strategy View Matrix Special Trade Recommendations Current MacroQuant Model Scores

Highlights Global oil markets will remain balanced this year with OPEC 2.0's production-management strategy geared toward maintaining the level of supply just below demand.  This will keep inventories on a downward trajectory, despite short-term upticks due to COVID-19-induced demand hits in EM economies and marginal supply additions from Iran and Libya over the near term. Our 2021 oil demand growth is lower – ~ 5.3mm b/d y/y, down ~ 800k from last month's estimate – given persistent weakness in realized consumption.  We have lifted our demand expectation for 2022 and 2023, however, expecting wider global vaccine distribution and increased travel toward year-end. The next few months are critical for OPEC 2.0: The trajectory for EM demand recovery will remain uncertain until vaccines are more widely distributed, and supply from Iran and Libya likely will increase this year.  This will lead to a slight bump in inventories this year, incentivizing KSA and Russia to maintain the status quo on the supply side. We are raising our 2021 Brent forecast back to $63/bbl from $60/bbl, and lifting our 2022 and 2023 forecasts to $75 and $78/bbl, respectively, given our expectation for a wider global recovery (Chart of the Week). Feature A number of evolving fundamental factors on both sides of the oil market – i.e., lingering uncertainty over the return of Iranian and Libyan exports and the strength of the global demand recovery – will test what we believe to be OPEC 2.0's production-management strategy in the next few months. Briefly, our maintained hypothesis views OPEC 2.0 as the dominant supplier in the global oil market. This is due to the low-cost production of its core members (i.e., those states able to attract capital and grow production), and its overwhelming advantage in spare capacity, which we reckon will average in excess of 7mm b/d this year, owing to the massive production cuts undertaken to drain inventories during the COVID-19 pandemic. Formidable storage assets globally – positioned in or near refining centers – and well-developed transportation infrastructures also support this position. We estimate core OPEC 2.0 production will average 26.58mm b/d this year and 29.43mm b/d in 2022 (Chart 2). Chart of the WeekBrent Prices Likely Correct Then Move Higher in 2022-23 Chart 2OPEC 2.0 Will Maintain Status Quo The putative leaders of the OPEC 2.0 coalition – the Kingdom of Saudi Arabia (KSA) and Russia – have distinctly different goals. KSA's preference is for higher prices – ~ $70-$75/bbl (basis Brent) to the end of 2022. Higher prices are needed to fund the Kingdom's diversification away from oil. Russia's goal is to keep prices closer to the marginal cost of the US shale-oil producers, who we characterize as the exemplar of the price-taking cohort outside OPEC 2.0, which produces whatever the market allows. This range is ~ $50-$55/bbl. The sweet spot that accommodates these divergent goals is on either side of $65/bbl for this year. OPEC 2.0 June 1 Meeting Will Maintain Status Quo With Brent trading close to $70/bbl, discussions in the run-up to OPEC 2.0's June 1 meeting likely are focused on the necessity to increase the 2.1mm b/d being returned to the market over the May-July period. At present, we do not believe this will be necessary: Iran likely will be returning to the market beginning in 3Q21, and will top up its production from ~ 2.4mm b/d in April to ~ 3.85mm b/d by year-end, in our estimation. Any volumes returned to the market by core OPEC 2.0 in excess of what's already been agreed going into the June 1 meeting likely will come out of storage on an as-needed basis. Libya will likely lift its current production of ~ 1.3mm b/d close to 1.5mm b/d by year end as well. We are expecting the price-taking cohort ex-OPEC 2.0 to increase production from 53.78mm b/d in April to 53.86mm b/d in December, led by a 860k b/d increase in US output, which will take average Lower 48 output in the US (ex-GOM) to 9.15mm b/d by the end of this year (Chart 3). When we model shale output, our expectation is driven by the level of prompt WTI prices and the shape of the forward curve. The backwardation in the WTI forward curve will limit hedged revenues at the margin, which will limit the volume growth of the marginal producer. We expect global production to slowly increase next year, and the year after that, with supply averaging 101.07mm b/d in 2022 and 103mm b/d in 2023.  Chart 3US Crude Output Recovers, Then Tapers in 2023 Demand Should Lift, But Uncertainties Persist We expect the slowdown in realized DM demand to reverse in 2H21, and for oil demand to continue to recover in 2H21 as the US and EU re-open and travel picks up. This can be seen in our expectation for DM demand, which we proxy with OECD oil consumption (Chart 4). EM demand – proxied by non-OECD oil consumption – is expected to revive over 2022-23 as vaccine distribution globally picks up. As a result, demand growth shifts to EM, while DM levels off. China's refinery throughput in April came within 100k b/d of the record 14.2mm b/d posted in November 2020 (Chart 5). The marginal draw in April stockpiles could also signify that as crude prices have risen higher, the world’s largest oil importer may have hit the brakes on bringing oil in. In the chart, oil stored or drawn is calculated as the difference between what is imported and produced with what is processed in refineries. With refinery maintenance in high gear until the end of this month, we expect product-stock draws to remain strong on the back of domestic and export demand. This will draw inventories while maintenance continues. Chart 4EM Demand Will Recovery Accelerates in 2022-23 Chart 8China Refinery Runs Remain Strong COVID-19-induced demand destruction remains a persistent risk, particularly in India, Brazil and Japan. This is visible in the continued shortfall in realized demand vs our expectation so far this year. We lowered our 2021 oil demand growth estimate to ~ 5.3mm b/d y/y, which is down ~ 800k from last month's estimate, given persistent weakness in realized consumption. Our demand forecast for 2022 and 2023 is higher, however, based on our expectation for stronger GDP growth in EM economies, following the DM's outperformance this year, on the back of wider global vaccine distribution year-end (Table 1). Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) Our supply-demand estimates continue to point to a balanced market this year and into 2022-23 (Chart 6). Given our expectation OPEC 2.0's production-management strategy will remain effective, we expect inventories to continue to draw (Chart 7). Chart 6Markets Remained Balanced Chart 7Inventories Continue To Draw CAPEX Cuts Bite In 2023 In 2023, we are expecting Brent to end the year closer to $80/bbl than not, which will put prices outside the current range we believe OPEC 2.0 is managing its production around (Chart 8). We have noted in the past continued weakness in capex over the 2015-2022 period threatens to leave the global market exposed to higher prices (Chart 9). Over time, a reluctance to invest in oil and gas exploration and production prices in 2024 and beyond could begin to take off as demand – which does not have to grow more than 1% p.a. – continues to expand and supply remains flat or declines. Chart 8By 2023 Brent Trades to /bbl Chart 9Low Capex Likely Results In Higher Prices After 2023 Bottom Line: We are raising our 2021 forecast back to an average of $63/bbl, and our forecasts for 2022 and 2023 to $75 and $78/bbl. We expect DM demand to lead the recovery this year, and for EM to take over next year, and resume its role as the growth engine for oil demand. Longer term, parsimonious capex allocations likely result in tighter supply meeting slowly growing demand. At present, markets appear to be placing a large bet on the buildout of renewable electricity generation and electric vehicles (EVs). If this does not occur along the trajectory of rapid expansion apparently being priced by markets – i.e., the demand for oil continues to expand, however slowly – oil prices likely would push through $80/bbl in 2024 and beyond.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish The Colonial Pipeline outage pushed average retail gasoline prices in the US to $3.03/gal earlier this week, according to the EIA. This was the highest level for regular-grade gasoline in the US since 27 October 2014. According to reuters.com, the cyberattack that shut down the 5,500-mile pipeline was the most disruptive on record, shutting down thousands of retail service stations in the US southeast. Millions of barrels of refined products – gasoline, diesel and jet fuel – were unable to flow between the US Gulf and the NY Harbor because of the attack, which was launched 7 May 2021 (Chart 10). While most of the system is up and running, problems with the pipeline's scheduling system earlier this week prevented a return to full operation. Base Metals: Bullish Spot copper prices remained on either side of $4.55/lb (~ $10,000/MT) by mid-week following a dip from the $4.80/lb level (Chart 11). We remain bullish copper, particularly as political risk in Chile rises going into a constitutional convention. According to press reports, the country's constitution will be re-written, a process that likely will pave the way for higher taxes and royalties on copper producers.1 In addition, unions in BHP mines rejected a proposed labor agreement, with close to 100% of members voting to strike. In Peru, a socialist presidential candidate is campaigning on a platform to raise taxes and royalties. Precious Metals: Bullish According to the World Platinum Investment Council, platinum is expected to run a deficit for the third consecutive year in 2021, which will amount to 158k oz, on the back of strong demand. Refined production is projected to increase this year, with South Africa driving this growth as mines return to full operational capacity after COVID-19 related shutdowns. Automotive demand is leading the charge in higher metal consumption, as car makers switch out more expensive palladium for platinum to make autocatalysts in internal-combustion vehicles. Ags/Softs: Neutral Corn prices continued to be better-offered following last week's WASDE report, which contained the department's first look at the 2021-22 crop year. Corn production is expected to be up close to 6% over the 2020-21 crop year, at just under 15 billion bushels. On the week, corn prices are down ~ 15.3%. Chart 10 Chart 11     Footnotes 1     Please see Copper price rises as Chile fuels long-term supply concerns published 18 May 2021 by mining.com. Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

Highlights The reason to own stocks is not profit growth. The combination of unspectacular sales growth and down-trending profit margins means that global profit growth will be lacklustre, at best. The reason to own stocks is that the ultimate low in the T-bond yield is yet to come. This ultimate low in the T-bond yield will define the ultimate high in the global stock market’s valuation and the end of the structural bull market in stocks. Until that ultimate low in bond yields, long-term investors should own stocks… …and tilt towards long-duration growth sectors and growth-heavy stock markets such as the S&P500 that will benefit most from the final collapse in yields. The correction in DRAM, corn, and lumber prices suggests that the recent mania in inflation expectations is about to end. Fractal trade shortlist: copper and tin are fragile, go long T-bonds versus TIPS. Feature Chart of the WeekGlobal Profits Surged During The Credit Boom, But Have Gone Nowhere Since The main reason to own stocks is not what you think. The usual long-term argument to own stocks is based on profit growth – specifically, that an uptrend in profits drives up stock prices. Except that since 2008, this is not true (Chart of the Week and Chart I-2). Profits have barely grown, yet the global stock market has doubled.1 Chart I-2Since The Credit Boom Ended, Global Profits Have Barely Grown As profits have barely grown since 2008, the main reason that the global stock market has doubled is that the valuation paid for those profits has surged. Looking ahead, we expect this to remain the main reason to own stocks. The Reason To Own Stocks Is Not Profit Growth Profits are the product of sales and the profit margin on those sales. During the credit boom of the nineties and noughties, the strong tailwind of credit creation supercharged sales growth. At the same time, the profit margin on those sales trended higher (Chart I-3). Chart I-3Since The Credit Boom Ended, Sales Growth Has Slowed And Profit Margins Have Trended Lower Hence, in the decade leading up to 2008, global stock market profits surged, outstripping both sales and world GDP. Then the credit boom ended, and profits languished, because: Absent the tailwind from the credit boom, sales growth moderated. The profit margin trended lower. In the post-pandemic years, we expect both trends to persist. The credit boom is not coming back. Furthermore, as the pandemic recession was not protracted, sales are not at a depressed level from which they can play a sharp catch-up, as they did after the 2008 recession and the 2015 emerging markets recession. The structural downtrend in the profit margin will continue. Meanwhile, the structural downtrend in the profit margin will continue. Governments are desperate to mitigate – or at least, contain – the ballooning deficits that have paid for their pandemic stimuluses. Raising corporate taxes from structurally depressed levels is an easy and politically expedient response, as we have already seen from both the Biden administration in the US, and the Johnson administration in the UK. Higher corporate taxes will weigh on structural profit margins (Chart I-4). Chart I-4Corporate Taxes Will Rise From Structurally Depressed Levels The combination of unspectacular sales growth and down-trending profit margins means that global profit growth will continue to be lacklustre, at best. The Reason To Own Stocks Is That The Ultimate High In Valuations Is Yet To Come To repeat, the main reason that the global stock market has doubled since 2008 is that its valuation has surged (Chart I-5). Chart I-5The Main Driver Of The Stock Market Has Been Valuation Expansion In turn, the stock market’s valuation has surged because bond yields have plummeted. Empirically, the valuation of the global stock market is tightly connected with the simple average of the (inverted) yields on the safest sovereign bond, the US T-bond, and the riskier sovereign bond, the Italian BTP. The main reason that the global stock market has doubled since 2008 is that its valuation has surged. Through 2012-13, the decline in the Italian BTP yield, by signifying the fading of euro break-up risk, boosted stock valuations. In more recent years though, it has been the US T-bond yield that has been more influential in driving the global stock market’s valuation (Chart I-6). Chart I-6The Stock Market's Valuation Expansion Is Due To Lower Bond Yields But the crucial point to grasp is that the relationship between the declining bond yield and stock market valuation becomes exponential. This is because as bond yields approach their lower bound, bond prices have less additional upside but considerably more downside. This extra riskiness of bonds means that investors demand a diminishing risk premium on equities versus bonds. So, as bond yields decline, the required return on equities – which equals the bond yield plus the risk premium – collapses. And as valuation is just the inverse of required return, valuations soar. Chart I-7 and Chart I-8 demonstrate this exponential relationship in practice. Note that the bond yield is on the logarithmic left scale while the stock market’s valuation is on the linear right scale. The logarithmic versus linear scale visually demonstrates that at a lower bond yield, a given change in the bond yield has a much greater impact on the stock market’s valuation. Chart I-7The Relationship Between Lower Bond Yields And Stock Market Valuation Expansion Is Exponential Chart I-8When Bond Yields Reach Their Ultimate Low, Stock Market Valuations Will Surge Specifically, if the 30-year yield in the US reached the recent low achieved in the UK, it would boost the stock market’s valuation by nearly 50 percent. We fully expect this to happen at some point in the coming years because of The Shock Theory Of Bond Yields which we introduced in last week’s report. In a nutshell, the shock theory of bond yields states that each successive deflationary shock takes the bond yield to a lower structural level, until it can go no lower. Although it is impossible to predict the timing and nature of individual shocks such as the pandemic, it is easy to predict the statistical distribution of shocks. On this basis, the likelihood of a net deflationary shock is 50 percent within the next three years, and 81 percent within the next five years. Whatever that deflationary shock is, and whenever it arrives, it will mark the ultimate low in the 30-year T-bond yield – at a level close to the recent low in the UK. This ultimate low in the T-bond yield will also define the ultimate high in the global stock market’s valuation and the end of the structural bull market in stocks. Until that ultimate low in bond yields, long-term investors should own stocks. And tilt towards long-duration growth sectors that will benefit most from the final collapse in yields. Growth sectors and growth-heavy stock markets such as the S&P500 will continue to outperform, as they have done consistently since 2008. The Inflation Bubble Is Bursting   The last couple of months has seen a mania in inflation expectations. As industries reconfigured for the end of lockdowns, supply bottlenecks in some commodities led to understandable spikes in their prices. These commodity price increases then unleashed fears about inflation. As investors sought inflation hedges, it drove up commodity prices more broadly … which added to the inflation fears…which added further fuel to the mania in inflation expectations. And so, the indiscriminate rally in commodities continued. The inflation bubble is bursting. But now it seems that the indiscriminate rally is over. DRAM prices have rolled over, belying the thesis that there is widespread shortage in semiconductors (Chart I-9). More spectacularly in the past week, the corn price has tumbled by 12 percent while the lumber price has slumped by 25 percent (Chart I-10). Chart I-9DRAM Prices Have ##br##Rolled Over Chart I-10Lumber Prices Are Correcting, Will Other Commodities Follow? Given that the commodity rally was indiscriminate, there is a danger that any correction will spread into other commodities like the industrial metals, copper and tin – especially as their fractal structures are at a level of fragility that has identified previous turning points in 2008, 2011, 2015, 2017 and 2020 (Chart I-11 and Chart I-12). Chart I-11Copper's Fractal Structure Is Fragile Chart I-12Tin's Fractal Structure Is Fragile In any case, the mania in inflation expectations is about to end. An excellent way to play this is to expect compression in the market implied inflation rate in T-bond yields versus TIPS yields (Chart I-13). Chart I-13The Mania In Inflation Expectations Is About To End Hence, this week’s recommended trade is to go long the 10-year T-bond versus the 10-year TIPS, setting a profit target and symmetrical stop-loss at 3.6 percent.   Dhaval Joshi Chief Strategist dhaval@bcaresearch.com   Footnotes 1  To clarify, Chart 2 shows world stock market earnings per share, both 12-month forward and 12-month trailing. Whereas Charts 1 and 3 show sales and net profits (not per share). Fractal Trading System Fractal Trades 6-Month Recommendations Structural Recommendations Closed Fractal Trades Closed Trades Asset Performance Equity Market Performance   Indicators To Watch - Bond Yields Chart II-1Indicators To Watch - Bond Yields - Euro Area Chart II-2Indicators To Watch - Bond Yields - Europe Ex Euro Area Chart II-3Indicators To Watch - Bond Yields - Asia Chart II-4Indicators To Watch - Bond Yields - Other Developed   Indicators To Watch - Interest Rate Expectations Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

ハイライト グローバル株式は大きな調整に非常に脆弱である。しかし景気循環的には米連邦準備制度（FRB）はインフレの上振れを容認する姿勢を取っており、世界経済は回復している。 中国の財政・信用インパルスが急低下しており、これによりグローバルの景気循環株およびコモディティは下押しを受けやすい。 短期を越えれば、中国の政治的安定の必要性が過度な政策引き締めを防ぐはずだ。リスクは前倒しになっている。 中国の国勢調査は当社のメガテーマの一つを裏付けている：中国の国内政治は不安定であり、ネガティブなサプライズをもたらし得る。 インドの州選挙は大規模なCOVID-19の波の最中に実施されたが、与党が2024年にも依然有利であることを示唆している。これは政策の継続を意味する。 景気循環派の強気バイアスを維持するが、中国が政策ミスを犯した場合には方針転換する準備をしておくこと。 特集 チャート 1 インフレ再浮上 インフレが頭をもたげる インフレが頭をもたげる 今週、米国のコアインフレが強く出たことと、長く眠っていたインフレが再び頭をもたげることへの幅広い懸念を受けて、グローバル市場は震撼した（チャート 1）。 景気循環的には、世界経済の回復に伴い投資家は米国株から国際株へローテーションし、米ドルは下落すると引き続き見ている（チャート 2）。しかしこの見方は、新興国株が先進国株に対してアウトパフォームし始めるべきだということも含んでおり、今年これまでのところはそれが実現していない。新興市場はテクノロジーに偏っており、米国の長期金利上昇に脆弱なだけでなく、中国の景気刺激がピークに達した今、さらに困難に直面している。 チャート 2 株式市場の動揺 株式市場が動揺 株式市場が動揺 チャート 3 世界経済とセンチメントの回復 世界経済とセンチメントは回復しつつある 世界経済とセンチメントは回復しつつある チャート 4 景気循環株対ディフェンシブの揺らぎ グローバルのシクリカル株とディフェンシブ株が揺らいでいる グローバルのシクリカル株とディフェンシブ株が揺らいでいる 我々が頼れる一つの事実は、COVID-19ワクチンの展開が続くことで世界的な成長回復を後押しするという点である（チャート 3）。米ドルもそれを示唆している。ドルは第1四半期に米国の相対的成長優位で反発したが、その後は下落に転じている。ドル安はディフェンシブに対して景気循環株にとってポジティブだが、景気循環株は短期的にはリフレーショントレードが過熱していることを示している（チャート 4）。 中国の成長が今や重要な焦点になる。中国の政策ミスは強気の景気循環見通しを覆すだろう。中国の金融・財政政策の引き締めは、今年我々が強調してきた主要なグローバルな政策リスクであり、今まさに顕在化している。しかし我々は引き締めの制約も指摘してきた。現時点で中国は我々のベンチマークによれば過度な引き締めの瀬戸際に立っている。さらなる引き締めが行われれば、我々は本質的によりディフェンシブな見方に転じるだろう。 本レポートではまた、中国の国勢調査の結果と、最新の大波のCOVID-19感染のもとで行われたインドの最近の州選の含意を検討する。我々はまだインドに対する強気見解を変更していないが、注視している。 中国：過度引き締めリスク 中国の問題は、対外貿易依存から内需依存への経済モデルの継続的な変化に起因している。これは習近平国家主席の台頭以前に共産党が採った戦略的決定であり、習はそれを体現し、戦略的ビジョンと米国との対立を通じて強化してきた。 北京の目標は滑らかで安定した移行を管理することだった。2015年の金融混乱や2018-19年の貿易戦争はその目標を危うくしたが、政策当局は最終的に持ちこたえた。そこへCOVID-19が発生し、1970年代以来の本格的な経済縮小をもたらした。中国はウイルスを抑え込み、貿易戦争開始から2021年のピークまでにGDP比13.8%に上る別の大規模な刺激で回復したが、今やさらに困難な移行に直面している。 チャート 5 中国の上昇する貯蓄傾向 中国の貯蓄傾向の高まり 中国の貯蓄傾向の高まり 潜在GDPが鈍化していることを考えると生活水準の改善の必要性は一層切迫している。債務の大幅な増加に鑑みると体系的な金融リスクを抑制する必要性も一層切迫している。米国が中国に対抗する民主諸国の連合を形成している今、経済の多角化の必要性も高まっている。長期預金比率などで測られる中国の家計・企業の「限界貯蓄性向」の急上昇は、国が困難に直面しアニマルスピリッツが抑えられていることの兆候である（チャート 5）。 2018-21年の大規模拡大の後、中国の財政・信用インパルスは低下に転じている。政策当局は昨年以降、緊急的な刺激を引き揚げるシグナルを出しており、その影響はハードデータに現れている。中国のマネー、クレジット、そして財政とクレジットを合わせたインパルスはいずれも、6〜9か月のラグの後に経済成長と相関する。これは中国のマネーとクレジットサイクルや経済活動を測る指標がどれであれ当てはまる（チャート 6Aおよびチャート 6B）。中国の経済モメンタムはピークに達しており、世界がワクチンと経済再開の追い風を享受しているにもかかわらず、今年後半から2022年にかけて世界経済にとって逆風となるだろう。 チャート 6A 中国の財政・信用インパルスが急落 … 中国の財政・信用インパルスが急落… 中国の財政・信用インパルスが急落… チャート 6B … マネー・アンド・クレジットのインパルスも同様に低下 ... マネー・アンド・クレジットのインパルスも同様である ... マネー・アンド・クレジットのインパルスも同様である 財政・信用インパルスのダウンシフトは、特に国内消費向けに中国が輸入するコモディティ、マテリアル、およびその他財の需要の鈍化を予示している（中国の輸出向け製造に投入される部品や中間財の輸入は、世界の回復とともに比較的健全に見える）。このシフトは、スウェーデン株などの中国関連プレイや急騰している金属価格が調整なしに上昇を続けることを困難にするだろう（チャート 7）。投機筋のポジショニングは現時点でコモディティに偏っている。中国とそれが支配する金属市場との乖離は短期的には耐え難いように見える（チャート 8）。 チャート 7 中国のリフレーショントレードはピーク付近 中国のリフレーショントレードはピーク付近 中国のリフレーショントレードはピーク付近 チャート 8 マネーサイクルとコモディティ価格の衝突 マネーサイクルとコモディティ価格の衝突 マネーサイクルとコモディティ価格の衝突 世界的なグリーンや再生可能エネルギーシステムへの移行（すなわち脱炭素化）は銅をはじめ金属にとって強気だが、短期的には中国の需要減を補うことはできないことを、我々のエマージング・マーケッツ・ストラテジーが示している。中国の建設・産業向けの銅の国内需要は世界総需要の約56.5%を占める一方、グリーンエネルギー競争（太陽光パネル、風力発電、電気自動車の生産等）は世界需要の約3.5%にすぎない。 この数値は既存のシステムや構造の再調整やレトロフィット（例：電力網）も見込まれているためグリーン計画をやや過小評価している面はある。しかし要点は、米国および欧州の消費が大幅に増加しても、中国の銅消費が減少すればそれに逆行することだ。特に米国のインフラ計画が早くても2022年まで本格的に始動しないことを考えれば、今後12か月で中国の影響で世界の銅需要は減速するだろう。 中国の政策当局はまだ過度な引き締めを懸念している、あるいは新たに政策を緩和する意思を示したわけではない。4月末の政治局会議は12月の中央経済工作会議や3月の政府活動報告から大きな政策変更を含んでいなかった（表 1）。しかしもし差異があるとすれば、昨年の緊急感をさらに後退させつつも、地方政府幹部を隠れ債務に対して説明責任を負わせるような何らかの仕組みを示唆した点にある。含意は引き続き引き締め的な政策であり、したがって過度の引き締めリスクは依然として大きい。 表 1 中国の最近のマクロ経済政策表明：刺激の縮小 中国は過度な金融引き締めの瀬戸際にある 中国は過度な金融引き締めの瀬戸際にある チャート 9 中国の政策引き締めのベンチマーク 中国の政策引き締めのベンチマーク 中国の政策引き締めのベンチマーク 確かに4月会議の「お茶の葉」は様々に読み取ることができる。4月の声明はマクロ経済政策指針から「必要な政策支援を維持する」という文言を外しており、これは経済への支援を減らすことを意味する可能性がある。しかし同時に、マネーサプライ（M2）とクレジット成長（社会融資総量）を名目GDP成長に合わせるという目標も外れており、これはクレジット成長の新たな上振れを許容するものと見なすこともできる。とはいえ中国人民銀行は第1四半期の金融政策報告書でこのクレジット目標を維持しており、確信は持てない。このルーブリックによれば、中国は我々がリスクを測るために用いる「過度引き締め」の瀬戸際にあることに注意されたい（チャート 9）。 過去20年の中国の政策運営に基づけば、我々は重大な転換点の発表は4月ではなく7月の政治局会議で行われると予想する。したがって4月は先の会合からの大きな変更とは見なしていないし、我々のチャイナ・インベストメント・ストラテジーも同様に見ていない。従って過度な政策引き締めは今後12か月で中国および世界経済に対する現実的なリスクであり、我々の過度引き締めチェックリストはこの点を強調している（表 2）。 表 2 中国の政策引き締めチェックリスト 中国、過度の引き締め寸前 中国、過度の引き締め寸前 中国の財政・信用のダウンシフトは、第20回党大会を控えて進行している。党大会は2022年を通じて行われ、秋に最高指導部（政治局常務委員）の交代で頂点に達する。共産党の100周年に当たる今年7月1日に向けて経済は十分に刺激されているため、政策当局は過剰を防ぐことに集中している。金融リスクの予防、反独占規制、不動産バブルの抑制が当面の命題である。企業および政府の債務不履行や破産の増加は、指導部が経済構造改革と改革を推し進める意志を裏付けており、近年これが確認されている（チャート 10）。 チャート 10 中国における創造的破壊 中国、過度な引き締め寸前 中国、過度な引き締め寸前 投資家は党大会があるからといって指導部が政策を緩和するだろうと想定してはならない。2017年の党大会の前にはむしろその逆のことが起きた。しかし、投資家はまた、中国が重要なイベントの前に自国経済を沈めるほど過度に引き締めるとも安易に想定してはならない。安定が目標となるだろう（2017年や以前の党大会でもそうであったように）──これは現行の引き締めが財政的・経済的にあまりにも痛みを伴う場合には政策緩和がいつか行われることを意味する。政策当局が転換点に達するまでは、中国関連資産は短期的に脆弱である。 ちなみに、第20回党大会の接近は政治的な暗闘や衝撃的な出来事を引き寄せるだろう。最高指導者は通常、党大会前に派閥の勢力を示すために有力なライバルを解任する。政府はまたメディア統制を強化し、事件の周辺で声を上げるか抗議するかもしれない反体制派を取り締まる。しかし2022年はその利害が一層高い。 習主席は当初2022年に退任すると見られていたが、今は退任しない見込みであり、これは少なくとも一部の反対を喚起するだろう。さらに習政権下で中国は三つの歴史的な政策革命を遂げた：強力な指導者モデルを採用し、前二代の集団指導モデルを損なったこと、経済の自給自足を重視して自由化と開放を犠牲にしたこと、そして大国としての地位を強調し米国や同盟国との協調を犠牲にしていることだ。 まとめ：中国の政策引き締めにより、グローバル株式、コモディティ、そして「中国プレイ」は大幅な調整リスクに直面している。当社のベースケースは中国が過度な引き締めを回避するというものだが、最新のマネーおよびクレジットの数値はその見方を変更する閾値に達している。これらの指標がさらに急落すれば見解を変更する必要がある。 中国の消えゆく労働力 最終的に過度な引き締めを抑制する制約の一つは、労働年齢人口の縮小による中国の潜在GDP成長の低下である。中国の第7回国勢調査が今週公表され、国とその経済に影響する深い構造変化を裏付けた。 過去10年の人口増加率は5.4%に鈍化し、1953年の最初の国勢調査以降で最低となった。出生率は2020年に1.3まで下落し、2.1の人口置換水準や2016年に一人っ子政策を緩和した際の目標1.8を下回っている。出生率は世界銀行の推計（2019年で1.7）や日本の数値よりも低い。人口1000人当たりの出生数も減少し、2020年の新生児数は1961年（大飢饉の年）以来の低水準となった。出生率は高所得国の水準に収束しており、経済発展が中国でも出産抑制の同じ効果をもたらしていることを示唆しているが、中国はこれらの国より発展段階が低い。 チャート 11 1990年代の日本より速く減少する中国の労働人口 中国、過度な金融引き締めの瀬戸際に立つ 中国、過度な金融引き締めの瀬戸際に立つ 最年少コホートの比率は16.6%から17.95%に上昇し、最年長コホートは2010年の8.9%から現在13.5%へ上昇、働き手層は75.3%から68.6%に低下した。労働年齢人口は2010年にピークに達し、過去10年で6.79ポイント減少した。対照的に日本の労働年齢人口は1992年にピークを迎え、その後の10年で2.18ポイント低下した（チャート 11）。 言い換えれば、中国は1990年代初頭に日本が経験した人口転換を経験しているが、中国の労働年齢人口はさらに速く減少する可能性がある。中国は日本が達したより低い1人当たり所得水準でこの大規模な社会経済的変化を経験している。 人口動態の課題は中国の社会経済的および政治的システムに圧力をかけるだろう。中国の奇跡は、他のアジアの奇跡と同様に、輸出製造により大量の貯蓄を生み出し、それを国家開発に再投資することを前提としていた。労働年齢人口の減少は経済発展と重なり、長期的には貯蓄率の低下をもたらすだろう。これはチャート 12に示されたように、二つの異なる中国の労働人口の図と国民貯蓄率を並べたものである。扶養比率が上昇するにつれて貯蓄率は低下し、再目的化に使える資金が減少する。資本コストは上昇し、経済構造改革は加速するだろう。 日本の場合、人口変化は1990年の金融危機と全国的な経済行動の変化と同時に起きた。貯蓄率は経済の変化とともに低下したが、生成された貯蓄は依然として投資を上回っており、これは民間需要の不足と大きな債務負担の圧力によるものであった。企業は投資と生産の拡大よりも債務圧縮に注力した（チャート 13）。これらは外部環境が良好だったときに起きたが、中国は地政学的緊張による経済的圧力が高まる文脈で同様の人口問題に直面している。 チャート 12 希少化する中国の労働者 中国の労働者が希少になりつつある 中国の労働者が希少になりつつある チャート 13 高貯蓄が債務拡大を可能にするが、やがて債務が圧倒する 高い貯蓄が借入拡大を促し、債務が耐え難くなるまで続く 高い貯蓄が借入拡大を促し、債務が耐え難くなるまで続く 中国はこれまで破滅的な金融危機や不動産価格の崩壊を回避しており、深刻な流動性の罠に陥る事態は避けている。中国当局は不動産バブルの危険を痛感しており、したがって金融の過剰を防ぎバブル的活動を抑制することに注力している。これが過度の引き締めリスクを重大なものにしている。しかしどちらか一方の誤りはデフレへの滑落を招き得る。習政権は活動が過度に減速したり金融の不安定性が手に負えなくなりそうな時は経済を刺激してきたが、これは難しいバランス行為であり、故に我々は過度引き締めリスクを綿密に監視している。 中国の国勢調査からのその他の注目点は以下の通りである： 二人っ子政策は現時点では成功していない。 COVID-19は出生率に悪影響を与えた可能性はあるが、タイミングの点で出生数を大きく歪めるほどではない。したがってトレンドはパンデミックだけで説明できない。 急速な都市化が続いており、都市化率は64%に達し、2010年から14ポイント上昇した。 政策議論は定年年齢の引き上げ、出産に対する財政的インセンティブの提供、子育てをより手頃にするための各種価格統制（特に不動産バブルの抑制）、および地方からの移住が続く中で中小都市の不動産価格が急落しないようにする措置を強調している。 中国の少数民族人口は総人口の9%を占め、過去10年で9%成長したのに対し、漢民族は91%で5%成長にとどまった。少数民族は一人っ子（二人っ子）政策の免除対象である。しかし、新疆のような自治区では民族間緊張が発生しており、中国の少数民族政策に対する国際的な監視が強まっている。 中国の人口動態上の課題は広く知られているが、最新の国勢調査はその規模を再確認させる。中国の潜在成長率は低下しており、上昇する扶養比率は政府に対する要求を強める社会変化を示している。より大きな財政・社会支出の必要は困難な経済的トレードオフと不人気な政治的決定を必要とするだろう。経済変化と人の移動は地域間および富の格差を深めるだろう。 これらすべての点は、我々の一貫したジオポリティカル・ストラテジーのメガテーマの一つを裏付けている：中国の国内政治リスクは過小評価されている。 まとめ：中国の2020年国勢調査は、中国の上昇する社会経済的・政治的課題の根底にある人口減少を強く裏付けるものである。中国は強力な中央政府を持ち、単一支配政党の下で権力が集約され、近年様々な課題を管理してきた実績はあるが、それでも現在進行中の変化の規模は圧倒的であり、ネガティブな経済的・政治的サプライズを招くだろう。 インド：州選はモディに対する転換点ではない インドで第2波のCOVID-19がピークにあった時期に、5州で選挙が行われた。中でも西ベンガル州の結果が最も重要だった。西ベンガルは大きな州であり、インド国会の議員のほぼ10分の1を占めている。ナレンドラ・モディ首相の与党バラティヤ・ジャナタ党（BJP）は294議席中約70%を獲得するとの目標を公言していた。 実際には、西ベンガルは地域政党であるオール・インディア・トリナムール会議（AITMC）の圧勝となった。AITMCは2期の反イナカム任期に直面していたにもかかわらず、議席数は過去最高を記録した。多くの予測を上回る結果であり、多くの世論調査が予想していなかったことが示された。 投資家はこの重要州でのBJPの敗北をどう受け止めるべきか。これはモディのパンデミック対応への反発か。2024年の総選挙で政権交代や国家政策の変更を予告するものか。そうとは言えない。ここで我々は三つの主要な示唆を挙げる： 示唆その1：BJPの成果は注目に値する チャート 14 インド：西ベンガルで足がかりを得たBJP 中国、過度な引き締めの瀬戸際 中国、過度な引き締めの瀬戸際 BJPは西ベンガルで目標には届かなかったが、この州はBJPの地盤ではない。BJPは英語で言えばヒンディー語圏で自然な支持基盤を持つとされ、西ベンガルは非ヒンディー語圏であり、伝統的にBJPは「外部勢力」と見なされてきた。またこの州は変化を受け入れにくいことで知られている。例えばAITMC以前は左派が34年という記録的な長期政権を維持していた。このような状況下で、BJPが2021年に77議席に増やしたことは注目に値する（2016年は3議席）（チャート 14）。 この成果によりBJPは西ベンガルで主要な野党となった。これはBJPが時間をかければ伝統的な強みを持たない州でも足場を築けることを示している。歴史的に弱い州でこの成果を上げたことは、BJPが依然として無視できない勢力であることの表れだ。 示唆その2：BJPの人気は後退したが、2024年に政権を維持する見込みは依然強い BJPに対する不満はCOVID-19対応の不手際とそれに伴う経済的困窮により高まっているが、国家レベルでBJPに代わる現実的な選択肢は存在しない。 最近の州選は、西ベンガルだけでなく、野党のインド国民会議（INC）がまだ体制を整えていないことを確認した。コングレスは西ベンガルで44議席から0議席に崩壊した。より重要なのは、コングレスが大衆にアピールする内部指導者を任命・選出する必要性と、識別可能な政策アジェンダを策定する必要性という二つの重要課題をまだ解決していない点である。 コングレスの弱さは、BJPの議席数が2019年のピークから減少する可能性があっても、我々の2024年のベースケースは依然としてBJP主導の政権がインドの政権を維持するというものであることを意味する。政策の継続性とある程度の構造改革の可能性がベースケースだ。 示唆その3：インドの地域政党の台頭 過去10年のBJPの台頭は、コングレスと地域政党の議席減少と同時に進んだ。しかし最近の州選は、BJPが地域政党の議席シェアを劇的に圧縮できないことを示している。例えば西ベンガルではBJPは単独で77議席を獲得したが、これはこの州で支配的なAITMCの犠牲になって得たものではない。一方、同月に選挙が行われた別の大州であるタミル・ナードゥでは二大地域政党の間で支配が揺れ続けている。 チャート 15 インド：BJPは2019年にピークを迎えたが2024年にも有力 中国は過度な引き締めの瀬戸際にある 中国は過度な引き締めの瀬戸際にある 2019年の総選挙では地域政党（BJPとコングレスを除く全党）のシェアは約40%から35%に低下した（チャート 15）。2024年の選挙では、BJPのピーク議席数が2019年の高水準から低下することにより、地域政党の議席シェアがやや上昇する可能性がある。 インドの地域政党の今後の台頭は単純な力学に根ざしている。BJPが2024年に二期目の現職となる可能性があるので、全国レベルでBJPに対する代替がない限り、有権者は差分的に地域政党を支持する選択をするだろう。 BJPは2024年に単独最大党として過半数を超える議席を獲得するポジションに留まるだろう。しかし与党が過半数を確保するために地域政党を取り込むシナリオも十分にあり得る。ただし2024年までは長い時間がある。COVID-19とその経済的影響への対応が、BJPが2019年の成果を超えることを難しくするだろう。次の重要な州選は2022年2月に予定されており、インド最大の州ウッタル・プラデーシュで選挙が行われる。ここでの結果は、BJPがパンデミックと経済ショックによる反イナカム効果をいかに緩和できるかを示すだろう。 結論：インドにおけるBJPの人気は揺らいでいるが劇的に崩れたわけではない。BJPは依然として2024年に過半数を超える単独最大政党になる位置にある可能性が高い。したがって当面この新興市場で政権不安は懸念されない。 中国の国内政治リスクとインドの政治的継続性を踏まえ、当面インド向けのトレードを維持する（チャート 16Aおよびチャート 16B）。ただし我々はインド全体のレビューを進めており、今後の特別レポートで顧客に結論を共有する予定である。 チャート 16A 新興国に対してインド債をロングで保有 インド債券を新興国（EM）に対してロングで維持する インド債券を新興国（EM）に対してロングで維持する チャート 16B インドロング／中国ショートを堅持 インドをロング、中国をショートで貫く インドをロング、中国をショートで貫く 投資上の示唆 短期的な安全資産トレードを維持する。天然ガス先物のロングは19.8%の利得でクローズ。 景気循環（12か月）の強気ポジションを維持し、グロースよりバリューを優先する。レアアースを含むコモディティおよび新興市場のロングを維持する。ただし、中国が我々のベンチマークに従って過度の引き締めを行った場合にはこれらのトレードをカットする準備をすること。 当面は新興国同業と比較してインドのローカル通貨建て債をオーバーウェイトし、インド株を中国株に対してロングする。だがインドに対する強気姿勢は精査中である。 チャート 17 テック売りの中で回復するサイバーセキュリティ株 サイバーセキュリティ株がテック株の暴落の中で反発 サイバーセキュリティ株がテック株の暴落の中で反発 サイバーセキュリティ株はロングで保有を継続すべきだが、地政学的「職場復帰」トレードとしてはサイバーよりも航空宇宙・防衛を引き続き好む。先週の一般的なテック売りの中でサイバーセキュリティ株はテックセクターに対して持ち直した。米国で発生した大規模なColonial Pipelineのランサムウェア攻撃は、東海岸の燃料供給の約45%を支える主要ネットワークを一時的に停止させた（チャート 17）。それでも重要インフラに対する攻撃はサイバーセキュリティが長期的なテーマであることを浮き彫りにしており、投資家はエクスポージャーを維持すべきである。サイバー株はワクチン発見以降、テック全体をアウトパフォームしている（チャート 18）。 チャート 18 サイバーセキュリティは構造的テーマである サイバーセキュリティは長期的なテーマである サイバーセキュリティは長期的なテーマである Matt Gertken バイスプレジデント 地政学ストラテジー mattg@bcaresearch.com Yushu Ma リサーチ・アソシエイト yushu.ma@bcaresearch.com Ritika Mankar, CFA 編集者／ストラテジスト Ritika.Mankar@bcaresearch.com

ハイライト IEAの最新予測によれば、2021–22年の期間における世界の発電設備増加のうち、再生可能エネルギーの設備容量が90％を占める見込みです。これは、昨年追加された再生可能エネルギーの発電設備容量が前年同期比で45％増加したこと（COVID-19パンデミック下でも発生した）を受けたものです（今週のチャート）。 再生可能エネルギーと電気自動車（EV）への継続的な投資、および世界経済の回復により、銀行や商社の銅価格予測は1トンあたり約13,000～20,000ドルのレンジに引き上げられつつあり、現在の約10,600ドル/トン（約4.80ドル/ポンド）と比べて高い水準となっています。 これらのより強い金属価格見通しが的中すれば、カーボン回収やサーキュラー利用技術を通じて化石燃料の低炭素利用を延長する投資の魅力が高まるでしょう。 これらの技術への投資は、投資を評価するための明確な世界的参照価格が存在しないため限定的でした。カーボン市場や炭素税がそのような基準を提供すれば投資は加速します。これはカーボン・マーケット・クラブを通じて監視でき、税を公表し徴収する加盟国に取引を限定します。1 特集 IEAの最新の再生可能エネルギーに関するアップデートによれば、昨年の再生可能エネルギーの設備容量増加はほぼ280GWで、前年同期比45％増と1999年以来の最大の伸びでした。2 今年および来年については、再生可能エネルギーが設備容量増加の90％を占めると見込まれており、特に太陽光PVへの投資は約50％増の162GWに達すると予想されています。風力は昨年90％増の114GWにまで成長し、2022年末までに約50％増加する見込みです。 再生可能エネルギーの発電量の増加と電気自動車（EV）への投資の拡大に伴い、バルク（鉄鋼および鉄鉱石）や、銅を先頭とするベースメタルの需要が価格を押し上げるでしょう。これは、2020年末までの4年間で供給の伸びが停滞し物理的な不足が続いた背景のもとで起きています（チャート2）。IEAによれば、2020年9月から2021年3月の期間で鉄鋼および銅価格が40％上昇したことが、太陽光PVモジュール価格上昇の一因となりました。 今週のチャート 再生可能エネルギー設備容量の急増 金属価格の急騰とカーボンキャプチャーの必要性 金属価格の急騰とカーボンキャプチャーの必要性 我々の評価では、銅市場の供給側は今年と来年も不足が続く見込みであり、Wood Mackenzieが想定するように、今後20年間で需要が年率約2％で成長し、鉱山事業者が需要に見合う設備投資（capex）に踏み切らない場合、この傾向は継続する可能性があります。3 チャート2 物理的な赤字が銅の在庫を引き下げる... 現物不足が銅在庫を取り崩す… 現物不足が銅在庫を取り崩す… 銅や、再生可能エネルギーの構築やインフラに必要な他の金属に関するESGリスクは、価格上昇に伴って高まり、コストを押し上げます。4 こうしたコスト上昇とESGリスクの増大は、我々の見解ではカーボン回収やサーキュラーエコノミー技術への投資魅力を高めます。これにより、もし技術が世界をネットゼロの方向へ近づけられるなら、低炭素の化石燃料の利用期間を延長することが可能になります。しかし、政府の政策がこの投資を誘発しない限り—例えば世界的なカーボン取引価格や炭素税を通じて—、これら技術への投資は低迷し続ける可能性が高いでしょう。 カーボン回収技術の果たせなかった約束 カーボン回収・利用・貯留（CCUS）の歴史は、高い期待と達成されない期待の繰り返しでした。気候変動緩和の手段として一般に認識されているものの、その導入は期待ほど速く進んでいません。 低炭素技術は化石燃料に基づく技術に比べてより多くの重要金属を必要とします（チャート3）。コストの問題に加え、再生可能エネルギー移行のために金属採掘が増えれば、採掘に伴うESGリスクも増大します。これについては当社の過去のリサーチで議論しました。5 Wood Mackenzieによれば、低炭素世界への移行を支えるのに必要な金属供給のために、鉱業会社は今後15年でほぼ1.7兆ドルの投資を行う必要があると推計しています。6 チャート3 低炭素技術は金属集約的である 金属価格の急騰とカーボン・キャプチャーの意義 金属価格の急騰とカーボン・キャプチャーの意義 こうした金属に関する差し迫った物理的需要を考えると、市場が現在織り込んでいるよりも長い期間、化石燃料が橋渡しとして使われるか、あるいは炭素をハイドロカーボンから除去する技術の成功度合いに応じて将来の一部として使われ続ける可能性が高いと言えます。そうであるならば、移行期において化石燃料を使い続けつつその環境影響を軽減するには、CO2やその他の温室効果ガス（GHG）排出を低減するための高度に焦点を絞った技術が必要になります。 そこでCCUS技術です：この技術は、化石燃料やバイオマスを用いて現代社会に必要なエネルギーを生産する過程で発生するCO2を捕捉します。現在の形態では、CO2は圧縮されて輸送されるか、地質構造や海洋貯留層に貯留されます。これを増進回収（EOR）に利用して、炭化水素を含む貯留層にCO2を注入することで採取が困難な油を抽出することも可能です。7 CCUS投資の余地 CCUSへの投資支出は増加しており、この技術を利用または実証する予定の施設数も増えています。IEAの『Energy Technology Perspectives 2020』の2020年版では、2017年以降に30件の新しい統合型CCUS施設が発表され、主に米国や欧州など先進国で進められているが、一部の新興国でも計画があると指摘しています。2020年時点で計画が高度な段階にあるプロジェクトは合計で270億ドルに相当し、2017年時点の計画投資の2倍以上となっています（チャート4）。 パリ協定の多くの目的の一つは、21世紀後半に人工的な排出と温室効果ガス（GHG）吸収（シンク）による除去との間でバランスを取ることです。実務的には、多くの国、特に新興国はこの期間中に開発のために化石燃料を使用し続ける必要があるでしょう（チャート5）。8 チャート4 ここまでのカーボン回収プロジェクト 急騰する金属価格とカーボンキャプチャーの必要性 急騰する金属価格とカーボンキャプチャーの必要性 チャート5 新興国の開発には化石燃料エネルギーが必要になる 高騰する金属価格とカーボン・キャプチャー導入の必要性 高騰する金属価格とカーボン・キャプチャー導入の必要性 エネルギー分野におけるCCUS 石炭に比べてGHG排出が少ない燃料、すなわち石炭のCO2の半分程度しか排出しない天然ガスは、グリーン発電への橋渡し（ブリッジ）として有効に使うことができます（チャート6）。 チャート6 天然ガスはブリッジ燃料として引き続き魅力的である 金属価格の急騰とカーボン・キャプチャ導入の必要性 金属価格の急騰とカーボン・キャプチャ導入の必要性 天然ガス中のCO2は、パイプライン品質のガスやLNGとして販売される前に除去する必要があります。通常、このCO2は大気中に放出されますが、CCUS技術を用いることで地質貯留層へ再注入し、増進回収（EOR）に利用することができます。このため、世界最大のLNG輸出国である米国のLNG企業は、より環境に配慮した事業運営を目指してCCUS技術への投資を検討しています。9 CCUSはまた、天然ガスや石炭を用いて低コストの水素（いわゆるブルー水素）を生産するためにも利用できます。これは再生可能エネルギー由来の電力を用いる電気分解による「グリーン水素」よりもコストが低く、ブルー水素の低コスト化は新興国にクリーンな水素を普及させ、脱炭素化に向けた新たな利用経路を開く可能性があります。 その他産業におけるCCUSの価値 CCUS技術は既存の発電所や産業プラントに後付けで導入することが可能であり、IEAによれば、そうでなければ2050年に約80億トンのCO2を排出し続ける可能性があるとされ、これは2020年のエネルギー部門の年間排出量のおよそ4分の1に相当します。 化石燃料を燃焼する発電所のうち、石炭火力発電は最大のCO2課題を抱えています。排出の大部分は中国やその他のアジア新興国から生じており、平均設備年齢は20年未満です。米国規制委員会協会によれば石炭火力発電所の平均寿命は40年であるため、これらの発電所は残存稼働年数が長く、2050年まで稼働し続ける可能性があります。既存の発電所や産業プラントを廃止したり用途変更したりする代替手段として、CCUSは唯一の選択肢となり得ます。 IEAは、ネットゼロ炭素排出を達成するにはCCUSが不可欠であると考えています。同機関のSustainable Development Scenarioでは、エネルギー部門からの世界のCO2排出が2070年までにネットゼロに減少するシナリオにおいて、CCUSは累積排出削減の15％を占めます。もし世界が2050年までにネットゼロを達成する必要がある場合、ほぼ50％多いCCUSの導入が必要となります。10 適切に実装・拡大されれば、CCUSは産業が石油、ガス、石炭を使い続けつつネットゼロ目標を達成することを可能にし、中期的には化石燃料需要を後押しする可能性があります。これは特に新興国の開発にとって重要です。 なぜCCUSはもっと進んでいないのか？何ができるか？ CCUSが広く使われていない主な理由はコストです。 現在、CO2を捕捉するコストはCO2濃度に基づいて変動し、直接空気回収（Direct Air Capture）が最も高価です（チャート7）。こうした高コストのために、CCUSは商業的に成立していません。 ただし、同じ議論は再生可能エネルギー導入に対してもかつては成り立ちました。かつて再生可能エネルギーの平準化発電コストは高価でしたが、政府補助金による拡大とスケールアップにより、ムーアの法則的なコスト低下曲線に沿ってコストは下がりました。Lazard Ltd.が報告する技術横断比較が可能な太陽光発電の平準化発電コストでは、2009年から2019年にかけて発電コストが89％低下し、359ドル/MWhから40ドル/MWhになりました（チャート8）。この学習曲線は、太陽光技術の導入を促進した政府補助金によって可能になりました。 チャート7 CCUSは高コストになり得る 金属価格の急騰とカーボンキャプチャーの必要性 金属価格の急騰とカーボンキャプチャーの必要性 チャート8 太陽光と同様に補助金がCCUSを支援し得る 補助金は、太陽光発電で行われたのと同様にCCUSを支援できる 補助金は、太陽光発電で行われたのと同様にCCUSを支援できる CCUS技術のコストは低下しています。例えば、2019年にGlobal CCS Instituteは、カナダのBoundary Damで2014年に稼働したCCSユニットでの捕捉コストが1トン当たり100ドルであったと報告しました。3年後に建設された米国のPetra Novaで、改良技術を用いた捕捉コストは1トン当たり65ドルでした。いずれも石炭火力発電所です。報告書はまた、Boundary DamやPetra Novaと同様のCCS技術を用いて2024–28年に稼働開始予定の石炭火力発電所では、学習曲線の進展、研究、規模の経済による資本コスト低下、デジタル化などにより1トン当たり約43ドルになると見込まれていると指摘しました。これらのコスト削減の共通点の一つは、企業がCCUSにより多く投資し、この技術に慣れ親しむ必要があるという点です。 再生可能エネルギーの事例と同様に、政府補助金はCCUSの運用コストの参入障壁を下げ、この技術の改良への参加を促します。初期の先駆的なCCUSは高価ですが、資本支援や税額控除といった補助によりCCUSの実装と研究は増加します。Boundary DamとPetra Novaは政府補助金の恩恵を受けた例であり、CCSユニット建設時にそれぞれカナダ政府および米国の機関から1億7,000万ドルと2億ドルの支援を受けました。 米国はまた45Q税額控除制度を導入しており、貯留されたCO2に対しては1トン当たり50ドル、増進回収のような用途で使用されたCO2に対しては1トン当たり35ドルを施設に支払います。Global CCS Instituteによれば、2019年末時点で米国に追加された8件の新しいCCUSプロジェクトのうち4件は、45Qの存在を主要な推進要因として挙げていました。 カーボン市場と炭素税の活用 2005年に導入されたEUの排出権取引制度（ETS）は、企業に市場の力を使って排出削減を促す革新的な政策の一例です。これらの市場で計測される炭素価格は、これまで記録されてこなかった負の外部性に具体的な価値を与えます。ETSの欠点は、長期の需給分析や計画を複雑にする政策変更に左右されるEUの環境政策実施に依存している点です。例えば、最近の目標引き上げでは2030年までに温室効果ガス排出を少なくとも55％削減することが掲げられました。 排出権の政策主導トレードに代わる手段としては、政府が課し徴収する排出量当たりの炭素税があります。これにより、鉱業で使用されるような化石燃料を用いる技術のコストが上昇し、再生可能エネルギー移行に必要なバルクやベースメタルの供給を増やすための技術を供給・使用する企業にCCUSなどでCO2を削減するインセンティブが与えられます。 ETS市場と政府によるCO2課税は、ウィリアム・ノードハウス（2018年ノーベル経済学賞受賞者）が提唱した技術であるカーボン・マーケット・クラブを形成することができます。これにより、加盟国がパリ協定で求められる実際の削減を取引や税制で示し参加していることを実証できる国に取引を限定できます。11 グリーンエネルギー移行が勢いを増し、各国がネットゼロ政策を実施するにつれて、炭素の価格は上昇するでしょう。炭素価格が上がると、企業の排出に関連するコスト負担が増加します。市場参加者が炭素価格が記録的水準に達した後も上昇を続けると見込む中で、EUで事業を行う企業にとってCCUS技術を採用するインセンティブは強まり、炭素税に直面する企業にとっても同様に導入の動機が高まります。12 要点： 緑の金属価格の急騰、設備投資の不足、そして低炭素未来のために採掘される金属に伴うESGリスクを踏まえると、我々は市場の織り込み以上に化石燃料が低炭素社会への移行で大きな役割を果たすと予想します。各国が気候目標を達成しつつ化石燃料を利用できるようにするためには、CCUS技術の利用が重要です。CCUSの普及を高めるためには、再生可能エネルギーの事例にならい、需要が確立するまで政府がこの技術を補助する必要があります。また、ETSや炭素税の導入促進も行動を触発するために必要です。   Robert P. Ryan チーフ・コモディティ＆エネルギー・ストラテジスト rryan@bcaresearch.com Ashwin Shyam リサーチ・アソシエイト コモディティ＆エネルギー戦略 ashwin.shyam@bcaresearch.com     コモディティ概況 エネルギー： 強気 記事作成時点で、ブレント原油価格は70ドル/バレルの水準に迫っていました。これはIEAが2021年後半の強い需要回復を評価したことを受けた動きです（チャート9）。IEAは2021年前半の需要増加見通しを27万b/d引き下げましたが、インドやOECDアメリカ、欧州でのCOVID-19による需要減少が主因であり、後半の見積りは維持しており、今年の総需要増は540万b/dとしています。EIAも今年の需要増を540万b/d、来年は370万b/dと見込んでいます。OPECは2021年通年の需要増を600万b/dのまま維持しました。OPEC 2.0は6月1日に再び会合し、我々の見立てでは市場により多くのサイドライン生産を戻すことを検討するでしょう。来週のレポートで需給バランスと価格見通しを更新する予定です。 ベースメタル： 強気 記事作成時点で、CME/COMEXのスポット銅価格はおおむね4.80ドル/ポンド付近で推移していました。チリでの増税の脅威（そのような税を求める法案が議会を通過しつつあること）、鉱山労働者のストライキの可能性、そして採鉱で使用される硫酸の不足（パンデミックによる製油所の稼働減少が原因で世界的に硫黄供給が減少したことによる）などが、ブルームバーグによれば銅を強く買われた状態にしています。当社の12月限COMEX銅の目標は5ドル/ポンド（LMEで約11,000ドル/トン）です。物理的な供給不足が在庫取り崩しを強い続け、金利構造をバックワーディテートさせると予想しているため、当社は2022年カレンダー物のCOMEX銅をロング、2023年をショートのポジションを継続しています。 貴金属： 強気 水曜日の米国のCPIデータは、4月の総合インフレ率が前年同月比で4.2％上昇したことを示しました。これは2008年以来の高水準ですが、この上昇はベース効果（昨年の同時期にパンデミックで物価が下落していたため）による部分もあると考えられます。物価上昇は金をインフレヘッジとしての需要を高めますが、もしこのデータを受けてFRBが金利を引き上げれば米ドル高となり、金価格にはマイナスに働きます（チャート10）。ただし我々はFRBがこの報告で指針を急激に転換するとは予想しておらず、中銀がこの一時的な上振れと扱うと見ています。昨日の終値時点でCOMEXの金は1,835.9ドル/オンスで取引されていました。 農産物／ソフト商品： 中立 記事作成時点で、シカゴ大豆市場は水曜日に発表予定のWorld Agriculture Supply and Demand Estimates（WASDE）レポートを前に上昇していました。先物の期近は約16.70ドル/ブッシェルで、日中で2％上昇していました。今月のWASDEには、2021/22作付年に対するUSDAの初の需要見積りが含まれ、需要の強まりにより供給が引き締まるとの見通しが市場で予想されています。 チャート9 ブレント価格が上昇中 ブレント価格が上昇中 チャート10 新型コロナの不確実性が金の需要を押し上げる可能性がある 新型コロナの不確実性が金の需要を押し上げる可能性がある   脚注 1     詳細はWorld Bankが2016年7月に公表したカーボン・マーケット・クラブと新パリ体制を参照してください。こうした技術の知的および計算の枠組みは、2018年ノーベル経済学賞受賞者のウィリアム・ノードハウスによって開発されました。 2     今週IEAが公表した再生可能エネルギー市場アップデート、2021年および2022年の見通し.pdfを参照してください。 3    WoodMacは「追加の大規模な投資がない限り、2024年以降生産は減少する。需要の伸びと相まって、この生産減少は理論的には2040年までに約16Mtの不足をもたらすだろう」と指摘しています。コンサルタントは、この期間の銅需要を満たすためにさらに3,250億～5,000億ドル以上の投資が必要になると見積もっています。詳細は供給成長の欠如は銅業界にしっぺ返しをもたらすか？（woodmac.com、2021年3月23日）をご覧ください。 4    当社が2021年4月29日に公表した需要拡大に伴う再生可能エネルギーのESGリスクの増大を参照してください。ces.bcaresearch.comで入手可能です。 5    脚注4を参照してください。 6    Reutersが公表した低炭素世界には1.7兆ドルの鉱業投資が必要をご覧ください。 7     この方法は石油生産を増加させるために用いられます。炭化水素の特性を変え、貯留層圧力を回復し、貯留層内での油の置換を促進します。EORを用いることで、石油会社は貯留層中の原油原始埋蔵量の30％から60％を回収することができます。詳細は米国エネルギー省が公表する増進回収をご覧ください。 8    ReutersのコラムCO2排出制限と経済開発を参照してください。 9    World Oilの記事米国のLNG業者はグリーンなイメージ向上のためにカーボン回収を唱えるをご覧ください。 10   IEAのカーボン回収・利用・貯留に関する特別報告（Energy Technology Perspectives 2020の一部）をご覧ください。 11    上の脚注1を参照してください。 12    Financial Timesの記事EUで汚染のコストが急騰、炭素価格が記録的な€50に達するを参照してください。 投資見解とテーマ 戦略的推奨事項 タクティカル・トレード コモディティ価格および取引参考表 2021年にクローズした取引 クローズした取引の要約 より高いインフレが到来 より高いインフレが到来

Highlights Duration: Despite last month’s weak employment growth, we continue to expect the economy to reach maximum employment in time for the Fed to lift rates in 2022. Maintain below-benchmark portfolio duration. TIPS: Long-maturity TIPS breakeven inflation rates have returned to levels that are consistent with the Fed’s target. Breakevens are also discounting a very rapid increase in near-term inflation at the front-end of the curve. Investors should take this opportunity to reduce TIPS exposure from overweight to neutral and to close inflation curve flattener and real yield curve steepener positions. Yield Curve: The Treasury curve has transitioned into a bear-flattening/bull-steepening regime beyond the 5-year maturity point, and as such, our recommended yield curve positioning must be re-considered. We recommend that investors position for maximum carry across the yield curve by going long the 5-year bullet and short a duration-matched 2/30 barbell. April Payrolls Shock The Bond Market In the current environment, there is probably nothing more important for US bond investors than keeping a close eye on the monthly employment data. The Federal Reserve has made the first rate hike contingent on a return to “maximum employment”, and bond yield fluctuations reflect the market’s changing assessment of the timing and pace of future Fed rate hikes. Chart 1A Big Miss On Payrolls With that in mind, investors got a shock last Friday when April’s employment report disappointed expectations by one of the widest margins ever. The economy added only 266 thousand jobs to nonfarm payrolls in April while the Bloomberg consensus estimate was calling for 1 million! At present, the market is looking for Fed liftoff in February 2023 (Chart 2). We calculate that monthly employment growth must average at least 412 thousand for the Fed to reach its maximum employment goal by the end of 2022, in time to lift rates in early-2023 (Chart 1 on page 1). Average monthly employment growth of at least 698 thousand is required to hit the Fed’s maximum employment target by the end of this year.1   Chart 2Market Priced For Liftoff In February 2023 The last section of this report (titled “Evidence Of A Labor Shortage In The April Payrolls Report”) explores possible reasons for the weaker-than-expected employment data and concludes that payroll growth will be stronger in the second half of this year. We continue to expect that the economy will reach maximum employment in time for the Fed to lift rates in 2022, and as such, we advise bond investors to maintain below-benchmark portfolio duration. Peak Inflation Last week, we downgraded our allocation to TIPS from overweight to neutral and closed two yield curve positions – an inflation curve flattener and a real yield curve steepener – that had been in place since April 2020.2 We made these moves for two reasons: There is a good chance that realized inflation won’t match the aggressive expectations that are already discounted in the front-end of the inflation curve. Long-maturity TIPS breakeven inflation rates are now consistent with the Fed’s target. In other words, they can’t rise much further without the Fed acting to bring them back down. On the first point, we continue to expect that inflation will be relatively strong between now and the end of the year, but the market has already more than priced-in this outcome. The 1-year CPI swap rate is currently 3.18% and the 2-year CPI swap rate sits at 2.99% (Chart 3). Even if we assume that core CPI increases by a robust +0.2% per month going forward, that will only cause 12-month core CPI inflation to reach 2.29% by the end of this year (Chart 4). Chart 3An Inflation Snapback Is Priced In Chart 4Inflation In 2021 Chart 5TIPS Are Very Expensive To further that point, this week we unveil our new TIPS Breakeven Valuation Indicator (Chart 5). The indicator is based on the theory of adaptive expectations – the theory that inflation expectations are formed based on recent trends in the actual inflation data. In essence, the indicator compares the current 10-year TIPS breakeven inflation rate to different measures of inflation and determines whether 10-year TIPS are currently cheap or expensive relative to 10-year nominal bonds. A negative reading indicates that TIPS are expensive, while a positive reading suggests that TIPS are cheap. At present, the indicator sits at -0.88. Historically, when TIPS are this expensive on our indicator there are strong odds that the 10-year TIPS breakeven inflation rate will fall during the next 12 months (Table 1). Table 1TIPS Breakeven Valuation Indicator Track Record On the second point, we have often noted that a range of 2.3% to 2.5% on long-maturity TIPS breakevens (levels seen during the mid-2000s) is consistent with the Fed’s inflation target. The 10-year and 5-year/5-year forward TIPS breakeven inflation rates haven’t spent much time near those levels during the past decade, but that is starting to change. The 10-year TIPS breakeven inflation rate recently shot up to 2.52%, above the top-end of our target band, while the 5-year/5-year forward TIPS breakeven inflation rate sits near the low-end of the range at 2.34% (Chart 6). Even Fed Chair Powell acknowledged that TIPS breakeven rates are “pretty close to mandate consistent” in the press conference that followed the April FOMC meeting.3 This is not to say that we expect the Fed to pivot quickly towards tightening. However, once the economy reaches maximum employment and the Fed starts to lift rates, the pace of rate hikes will be much quicker if long-maturity TIPS breakeven inflation rates are threatening to break above 2.5%. This puts a long-run ceiling on TIPS breakevens, one that we are quickly approaching. As for our inflation curve flattener and real yield curve steepener positions, neither makes sense unless TIPS breakeven rates continue to rise (Chart 7). Chart 6Long-Maturity Breakevens Are At Target Chart 7Exit Inflation Curve Flattener And Real Yield Curve Steepener   The cost of inflation compensation is much more volatile at the front-end of the curve than at the long end, which means that the inflation curve tends to flatten when breakevens rise and steepen when they fall. In other words, the inflation curve will not flatten further unless breakevens move higher. While we don’t see room for further inflation curve flattening, we also think that the curve will remain inverted. With the Fed targeting a temporary overshoot of its 2% inflation target, an inverted inflation curve is much more consistent with the Fed’s stated goals than a positively sloped one. As for the real yield curve, it’s easiest to think of a real yield curve steepener as the combination of a nominal curve steepener and an inflation curve flattener. If the inflation curve holds steady, then there is no difference between a real yield curve steepener and a nominal yield curve steepener. On that note, the next section of this report discusses why the case for a nominal yield curve steepener is also starting to break down. Bottom Line: Long-maturity TIPS breakeven inflation rates have returned to levels that are consistent with the Fed’s target. Breakevens are also discounting a very rapid increase in near-term inflation at the front-end of the curve. Investors should take this opportunity to reduce TIPS exposure from overweight to neutral and to close inflation curve flattener and real yield curve steepener positions. Nominal Treasury Curve: Pick Up Carry In Bullets The average yield on the Bloomberg Barclays Treasury Master Index troughed on August 4th 2020 and rose by 92 basis points until it peaked on April 2nd. The Treasury curve steepened dramatically during that period, with increases in the 10-year and 30-year yields far outpacing the rise in the 5-year yield (Table 2). Table 2Treasury Yield Changes Since The August 2020 Trough But the shape of the yield curve has behaved differently since yields peaked on April 2nd. The average index yield is down 11 bps since then, but the decline has been led by the 5-year while the 10-year and 30-year yields have been relatively sticky. We view this as evidence that, as we edge closer to an eventual rate hike cycle, the yield curve is entering a new regime. This is a natural progression. When rate hikes are only expected to occur far into the future, there will be very little volatility at the front-end of the curve and the yield curve will tend to steepen when yields rise and flatten when they fall. But over time, as we get closer to expected rate hikes, volatility will shift toward shorter and shorter maturities. This will eventually cause the yield curve to flatten when yields rise and steepen when they fall. Chart 8Buy 5-Year Versus 2/30 While there is still very little volatility in 1-3 year yields, it looks like the curve beyond the 5-year maturity point has transitioned into a bear-flattening/bull-steepening regime. That is, when yields rise we should expect the 5/30 slope to flatten and when yields fall we should expect the 5/30 slope to steepen. Indeed, we see that a gap has recently opened up between the trends in the 5/30 slope and the Treasury index yield, while the 2/5 slope remains tightly correlated with the level of yields (Chart 8). The big implication of this regime shift is that we should no longer expect our current recommended yield curve position, long the 5-year bullet and short a duration-matched 2/10 barbell, to perform well in a rising yield environment. To profit from rising yields, investors would be better off positioning for a flatter 5/30 curve by going short the 10-year bullet and long a duration-matched 5/30 barbell. However, this is not the strategy we’d recommend for investors who are already running below-benchmark portfolio duration and are thus already exposed to rising yields. The reason is that while we think the market’s current expected fed funds rate path is slightly too dovish, it is not that far from a reasonable forecast. Put differently, we see bond yields as biased higher but the near-term upside could be limited. For this reason, and since we are already exposed to higher yields through our portfolio duration call, we prefer to enter a yield curve position that will profit from an environment of stable yields. That is, a carry trade that offers a large amount of yield pick-up. The best trade in that regard is a position long the 5-year bullet and short a duration-matched 2/30 barbell (Chart 8, bottom panel). This position offers a positive yield pick-up of 31 bps, a nice cushion against the risk of capital losses from further 2/30 steepening. Bottom Line: The Treasury curve has transitioned into a bear-flattening/bull-steepening regime beyond the 5-year maturity point, and as such, our recommended yield curve positioning must be re-considered. We recommend that investors position for maximum carry across the yield curve by going long the 5-year bullet and short a duration-matched 2/30 barbell. Evidence Of A Labor Shortage In The April Payrolls Report Given the well-founded optimism about the pace of US economic recovery (real GDP grew 6.4% in the first quarter after all) it was very surprising that only 266 thousand jobs were added in April. One possible reason for the weak job growth is that a lack of labor supply is holding it back. We explored this issue in a recent report and concluded that there is a lot of evidence to support the claim.4 While it is a bad idea to read too much into any single datapoint, we think it’s likely that the labor shortage played a significant role in April’s poor employment number. At first blush, the industry breakdown of April’s employment report appears to refute the labor shortage narrative. For example, the Leisure & Hospitality sector added 331 thousand jobs on the month, by far the most of all the industry groups (Table 3). This is interesting because the Leisure & Hospitality sector – primarily restaurants and bars – is a close-contact service industry with low average wages, the exact sort of industry where we would expect to see evidence of a labor shortage. Table 3Employment By Industry But we don’t think strong Leisure & Hospitality job growth refutes the labor shortage narrative. For one thing, while +331k is a lot of new jobs in a single month, it could have been a lot more. The third column of Table 3 shows that the Leisure & Hospitality industry is still 2.8 million jobs short of where it was prior to COVID. Further, other indicators within the Leisure & Hospitality sector clearly point toward a lack of labor supply. The Job Openings Rate is much higher in the Leisure & Hospitality sector than in the economy as a whole (Chart 9) and Leisure & Hospitality wages have grown much more quickly during the past few months (Chart 9, bottom panel). It seems highly likely that Leisure & Hospitality job growth would be stronger if not for supply side constraints. More generally, economy-wide measures of labor demand have recovered much more quickly than the actual employment data (Chart 10). The job openings rate and the NFIB Jobs Hard To Fill survey have both surpassed their pre-COVID peaks, and more households describe jobs as “plentiful” than as “hard to get”. The one outlier is the unemployment rate which, after controlling for furloughed workers, has barely budged off its peak (Chart 10, bottom panel). This points strongly to labor supply being the limiting factor, not demand. Chart 9Leisure & Hospitality Wages Are Accelerating Chart 10Evidence Of A Labor Shortage   Bottom Line: There is a lot of evidence that a lack of labor supply is holding back job growth. However, we expect that supply constraints will be cleared up relatively soon as widespread vaccination makes people more comfortable re-entering the labor force, and as expanded unemployment benefits lapse. We expect that job growth will be much stronger in the second half of 2021 and into 2022.   Ryan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 We define maximum employment as an unemployment rate of 4.5% and a labor force participation rate equal to its pre-COVID level of 63.3%. 2 Please see US Bond Strategy Weekly Report, “Negative Oil, The Zero Lower Bound And The Fisher Equation”, dated April 28, 2020. 3 https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20210428.p… 4 Please see US Bond Strategy Weekly Report, “Making Money In Municipal Bonds”, dated April 27, 2021. Fixed Income Sector Performance Recommended Portfolio Specification