Technological Advances

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

Dear Client, In addition to our regular report, this week we are sending a Special Report written by my colleague Lucas Laskey from BCA Research’s Equity Analyzer service titled “Is The Reopening Trade Closed?”. The report discusses the state of the reopening trade through the lens of Equity Analyzer's factor model. I hope you find the report insightful. Additionally, please join us next week on Friday, May 7, 2021 at 10am EDT as I moderate a debate between my colleagues Arthur Budaghyan, BCA Research’s Chief Emerging Market Strategist, and Robert Ryan, Chief Commodity & Energy Strategist. Titled “A Debate On Commodities,” Arthur and Bob will discuss the outlook for commodities, touching on the trajectory both DM and China/EM growth will follow, the path for the US dollar, and other cyclical and structural forces currently shaping commodity markets. During the webcast, Arthur and Bob will highlight the areas they disagree on and the reasons behind their differing views. Best regards, Peter Berezin Chief Global Strategist Highlights Bitcoin is on a collision course with ESG. ESG interests will win out. Widespread adoption of cryptocurrencies, if it were to happen, would erode the purchasing power of traditional money, while robbing governments of billions of dollars in seigniorage revenue. Governments have already begun to take steps to thwart such an outcome. Restrictions on the use of cryptocurrencies will only increase over the coming years. The rollout of Central Bank Digital Currencies (CBDCs) represents an existential threat not only to cryptos, but potentially to credit card companies and online payment processors such as PayPal, Square, Venmo, WeChat Pay, and Alipay. Shorting cryptocurrencies, meme stocks, or any other high-flying asset is risky business. Fortunately, there is a way to flip the usual risk-reward from going short on its head. Rather than facing unlimited losses and a maximum gain of only 100% of the initial position, we outline a shorting strategy that caps the loss at 100% but allows for unlimited gains. Bitcoin’s Questionable ESG Record Crypto critics have often blamed cryptocurrencies for facilitating illicit transactions and enlarging the world’s carbon footprint. There is some truth to both claims. Motivated to avoid detection, online scammers, smugglers, and terrorists have been drawn to cryptocurrencies. Cryptos have also been used to evade capital controls and conceal wealth from the tax authorities. On the environmental side, Bitcoin mining now consumes more energy than entire countries such as Sweden, Argentina, and Pakistan (Chart 1). Moreover, about 70% of Bitcoin mining currently takes place in China, mainly using electricity generated by burning coal. A lot of the remaining mining occurs in countries such as Russia and Iran with questionable governance records. Chart 1How Dare You, Bitcoin Cryptos And Inequality One criticism of Bitcoin that is less frequently mentioned is its role in exacerbating wealth inequality. We are not just talking about the small number of “whales” who amassed huge fortunes by buying or mining Bitcoin shortly after it was created. If these whales sell their coins at today’s prices and the price of  Bitcoin eventually crashes, those early investors will have ended up profiting at the expense of smaller investors who bought at the top. While such a transfer of income may be unsavory, it is not much different from what happens when someone sells a high-flying stock to the proverbial bagholder just as the stock is peaking. The more interesting question is what happens if Bitcoin prices do not crash. It might be tempting to think that in such a scenario, no one would be worse off. But that is incorrect. There would still be losers, and importantly, these losers would consist of people who never bought or sold Bitcoin in their lives. To see why, ask yourself who suffers from counterfeit currency. One possibility is shopkeepers who inadvertently accept counterfeit cash and find themselves stuck with worthless money. But even if the counterfeit money is never detected, there would still be losers: Fake money dilutes the value of genuine money, making everyone who holds the genuine money worse off. Crypto evangelists like to argue that cryptocurrencies offer protection against the “debasement of fiat money.” Ironically, the widespread adoption of cryptocurrencies could produce a self-fulfilling cycle that leads to just such an inflationary outcome. If enough people decide to swap fiat currencies for cryptos, the dollar and other fiat monies could become “hot potatoes.” The price of cryptos would rise in relation to dollars. Feeling more wealthy, crypto holders would spend some of their wealth on goods and services. As long as the economy is operating below potential, this would not be such a bad thing since increased spending would generate more output and employment. However, once the output gap disappears, more spending would result in higher inflation. The purchasing power of fiat currencies would decline. The Empire Strikes Back Will governments allow such a massive transfer of wealth from holders of fiat currencies to holders of crypto currencies to occur? It seems highly unlikely. In order to entice people to hold on to their fiat currency bank deposits, central banks would have to raise interest rates. Debt-strapped governments would not like that. Governments also generate significant revenue from their ability to print currency and then exchange it for goods and services. For the US, this “seigniorage revenue” is around $100 billion per year (Chart 2). No government will want to part with this revenue. A financial system where loans and deposits are denominated in cryptocurrencies would be highly unstable. Even if the supply of each individual cryptocurrency were capped, the rise and fall of competing cryptocurrencies could still result in large shifts in the aggregate cryptocurrency money supply. Moreover, wild swings in cryptocurrency prices, both versus fiat currencies and one another, could destroy any semblance of price stability. The value of bank loans made in Bitcoin or other cryptos would experience great fluctuations. Powerless to issue cryptocurrencies themselves, central banks would not be able to provide unlimited liquidity support to commercial banks as they do now. The situation would resemble the US in the late 19th century when myriad currencies competed with one another and the financial system veered from one crisis to another (Chart 3). Chart 2Governments Will Not Part With Seigniorage Revenue Chart 3An Inelastic Money Supply Historically Led To More Banking Crises   What Is It Good For? One might argue that the ultimate aim of cryptocurrencies is not to displace fiat money. Okay, but if Bitcoin can never truly function as a medium of exchange or a unit of account, what exactly underpins its utility as a store of value? At least with gold, you get an extremely rare metal, forged in the collision of neutron stars billions of years ago, that has great aesthetic value. With cryptos, you get fairy dust. In past reports, we referred to Bitcoin as a “solution in search of a problem.” In retrospect, that characterization was much too charitable. Bitcoin is a problem in search of a problem. Whereas the Visa network can process over 20,000 transactions per second, the Bitcoin network can barely process five (Chart 4). Bitcoin transactions take 10 minutes-to-an hour to complete compared to just a few seconds for most debit or credit card transactions. The average fee for a Bitcoin transaction is around $30. This fee has been rising, not falling, over the past few years (Chart 5). Chart 4Bitcoin: The Speed Of Transactions, Or Lack Of It Chart 5Bitcoin: The Cost Per Transaction Is Rising     Look Out Below Table 1A Growing List Of Cryptocurrency Bans Cryptos are heading for a world of pain. ESG concerns will force companies to step back from their newfound infatuation with these magic beans. Meanwhile, governments will tighten the screws on cryptocurrencies while rolling out their own digital monies. As my colleague Chester Ntonifor pointed out last week, a growing list of countries have already moved to ban Bitcoin transactions (Table 1). In addition, most G10 central banks have outlined their own digital currency plans (Map 1). Not only will Central Bank Digital Currencies (CBDCs) squeeze out decentralised cryptocurrencies, they will also pose an existential risk to credit card companies and online payment processors such as PayPal, Square, Venmo, WeChat Pay, and Alipay. Map 1Many Central Banks Are Planning A Digital Currency The Risk Of Shorting Bitcoin These days, there is no shortage of ways to short Bitcoin. Many cryptocurrency platforms permit short selling. In addition, one can bet against Bitcoin through the futures market. To the extent that the fortunes of companies such as Coinbase are tied to the crypto market, one can also express a short view on cryptos through listed equities. Yet, shorting cryptos is a risky strategy. Cryptocurrencies do not have any intrinsic value. What you think a Bitcoin is worth depends on what others think it is worth and vice versa. At present, the value of all Bitcoins that have ever been issued is about $1 trillion. Eighteen cryptocurrencies have valuations exceeding $10 billion (Table 2). The market capitalization of all cryptocurrencies in circulation stands at $2 trillion. In contrast, the value of all the gold that has ever been mined is around $10 trillion (Chart 6). It is certainly possible that euphoric investors will push up the value of cryptocurrencies to the point that they are collectively worth more than all the gold in the world. Table 2Close To 20 Cryptos Have A Market Cap In Excess Of US$10bn Chart 6Gold Versus Cryptocurrencies     To guard against this risk, one needs a prudent strategy for shorting not just high-flying cryptocurrencies, but any security whose price can rise significantly. Luckily, such a strategy exists. How To Short Without Losing Your Shorts Clients sometimes ask me what I invest my money in. The answer is that most of my liquid wealth is held in publicly traded US small cap stocks. I have been investing in this space for over two decades (prior to joining Goldman, I even wrote a blog about it). I used my knowledge of stock picking to develop an early version of BCA’s Equity Analyzer. David Boucher and his team have since transformed it into a powerful, state-of-the-art stock selection service. Table 3Don’t Be Like Melvin Shorting small cap stocks is risky business. To limit the risk, I have employed a strategy that flips the usual risk-reward from shorting on its head. Normally, when you short a stock, your gain is capped at 100% of the initial position whereas your potential loss is unlimited. With my shorting technique, your potential loss is capped at 100% while your potential gain is unlimited. To illustrate how the strategy works, let us consider shorting one particular overpriced “meme” stock that has been in the news a lot this year. I won’t single out the name of the company, other than to note that it begins with “G” and ends with “stop.” At the time of writing, this mystery stock was trading at $180 per share. Suppose you shorted 1,000 shares at that price. The basic idea is to then short 2% more shares if the price falls by 1% and cover 2% of your shares if the price rises by 1%. So, in this case, you would increase your short position to 1020 shares if the price were to fall to around $178 but cover 20 shares (leaving you with 980 shares short) if the price were to rise to $182. Table 3 shows the number of shares you would need to be short for any given price between $5 and $360. If the price of the shares were to fall to $10 (double what it was last August), the strategy would generate roughly $3,060,000 in profits.1 In contrast, if the price were to rise to $360 per share, the strategy would incur a loss of $90,000. Even if the price went to infinity, the most you would lose is $180,000. There are a number of challenges to implementing this strategy: 1) It requires frequent trading; 2) gap downs and gap ups in the price could meaningfully hurt the results; 3) it is not always possible to short a stock and even when it is, the borrowing costs could be high, etc. Nevertheless, as a “rule of thumb,” I have found this strategy to be extremely effective in mitigating risk.   Peter Berezin Chief Global Strategist pberezin@bcaresearch.com   Footnotes 1    Notice that the profit of $3,060,000 from going short 1,000 shares in the case where the price of the stock falls from $180 to $10 is equal to 17 times the initial short position of $180,000 (i.e., $3,060,000 divided by 180,000 is 17). This is exactly the same return that one would earn if one went long the stock and the price rose from $10 to $180. In this case, the profit would also be equal to 17 times the initial investment (i.e., $1,800,000-$100,000 divided by $100,000 is 17). Global Investment Strategy View Matrix Special Trade Recommendations Current MacroQuant Model Scores

Highlights Rising CO2 emissions on the back of stronger global energy growth this year will keep energy markets focused on expanding ESG risks in the buildout of renewable generation via metals mining (Chart of the Week).   EM energy demand is expected to grow 3.4% this year vs. 2019 levels and will account for ~ 70% of global energy demand growth.  Demand in DM economies will fall 3% this year vs 2019 levels.  Overall, global demand is expected to recover all the ground lost to the COVID-19 pandemic, according to the IEA.  Rising energy demand will be met by higher fossil-fuel use, with coal demand increasing by more than total renewables generation this year and accounting for more than half of global energy demand growth. Demand for renewable power will increase by 8,300 TWh (8%) this year, the largest y/y increase recorded by the IEA.  As renewables generation is built out, demand for bulks (iron ore and steel) and base metals will increase.1  Building that new energy supply will contribute to rising CO2, particularly in the renewables' supply chains. Feature Energy demand will recover much of the ground lost to the COVID-19 pandemic last year, according to the IEA.2 Most of this is down to successful rollouts of vaccination programs in systemically important economies – e.g., China, the US and the UK – and the massive fiscal and monetary stimulus deployed to carry the global economy through the pandemic. The risk of further lockdowns and uncontrolled spread of variants of the virus remains high, but, at present, progress continues to be made and wider vaccine distribution can be expected. The IEA expects a global recovery in energy demand of 4.6% this year, which will put total demand at ~ 0.5% above 2019 levels. The global rebound will be led by EM economies, where demand is expected to grow 3.4% this year vs. 2019 levels and will account for ~ 70% of global energy demand growth. Energy demand in DM economies will fall 3% this year vs 2019 levels. Overall, global demand is expected to recover all the ground lost to the COVID-19 pandemic, according to the IEA. Chart of the WeekGlobal CO2 Emissions Will Rebound Post-COVID-19 Coal demand will lead the rebound in fossil-fuel use, which is expected to account for more than total renewables demand globally this year, covering more than half of global energy demand growth. This will push CO2 emissions up by 5% this year. Asia coal demand – led by China's and India's world-leading coal-plant buildout over the past 20 years – will account for 80% of world demand (Chart 2). Chart 2China, India Lead Coal-Fired Generation Buildout Demand for renewable power will post its biggest year-on-year gain on record, increasing by 8,300 TWh (8%) this year. This increase comes at the back of roughly a decade of an increasing share of electricity from renewables globally (Chart 3). As renewables generation is built out, demand for bulks (iron ore and steel) and base metals will increase.3 Building that new energy supply will contribute to rising CO2, particularly in the renewables' supply chains. Chart 3Share of Electricity From Renewables Has Been Increasing ESG Risks Increase With Renewables Buildout Governments have pledged to invest vast sums of money into the green energy transition, to reduce fossil fuels consumption and deforestation, thus curbing temperature increases. In addition, banks have pledged trillions will be made available to support the buildout of renewable technologies over the coming years. The World Bank, under the most ambitious scenarios considered (IEA ETP B2DS and IRENA REmap), projects that renewables, will make up approximately 90% of the installed electricity generation capacity up to 2050. This analysis excludes oil, biomass and tidal energy. (Chart 4). Building these renewable energy sources will be extremely mineral intensive (Chart 5). Chart 4Renewables Potential Is Huge … While we have highlighted issues such as a lack of mining capex and decreasing ore grades in past research – both of which can be addressed by higher metals and minerals prices – the environmental, social and governance (ESG) risks posed by mining are equally important factors for investors, policymakers and mining companies to consider.4 The mining industry generally uses three principal sources of energy for its operations – diesel fuel (mostly in moving mined ore down the supply chain for processing), grid electricity and explosives. Of these three, diesel and electricity consumption contributes substantially to mining’s GHG emissions. In the mining stage, land clearing, drilling, blasting, crushing and hauling require a considerable amount of energy, and hence emit the highest amounts of greenhouse gases (GHGs). Chart 5… As Are Its Mineral Requirements The Environmental Impact Of Mining Under the scenarios depicted in Chart 5, copper suppliers could be called on to produce approximately 21mm MT of the red metal annually between now and 2050, which is equivalent to a 7% annual increase of supplies vs. the 2017 reference year shown in the chart. Mining sufficient amounts of copper, a metal which is critical to the renewable energy buildout, both in terms of quantity and versatility, will test miners' and governments' ability to extract sufficient amounts of ore for further processing without massively damaging the environment or indigenous populations' habitats (Chart 6). Chart 6Copper Spans All Renewables Technologies A recent risk analysis of 308 undeveloped copper orebodies found that for 180 of the orebodies – roughly equivalent to 570mm MT of copper – ore-grade risk was characterized as moderate-to-high risk.5 High risk implies a lower concentration of metal in the ore deposits. Mining in ore bodies with lower copper grades will be more energy intensive, and thus will emit more greenhouse gases. Table 1 is a risk matrix of the 40 mines that have the most amount of copper tonnage in this analysis: 27 of these mines displayed in the matrix have a medium-to-high grade risk. Table 1Mining Risk Matrix Another analysis established a negative relationship between the ore-grade quality and energy consumption across mines for different metals and minerals.6 This paper found that, as ore grade depletes, the energy needed to extract it and send it along the supply chain for further processing is exponentially higher (Chart 7). Lastly, a recent examination found that in 2018, primary metals and mining accounted for approximately 10% of the total greenhouse gases. Using a case study of Chile, the world’s largest producer of the red metal, the researchers found that fuel consumption increased by 130% and electricity consumption per unit of mined copper increased by 32% from 2001 to 2017. This increase was primarily due to decreasing ore grades.7 As ore grades continue to fall, these exponential relationships likely will persist or become more significant. Chart 7Energy Use Rises As Ore Quality Falls Bottom Line: While technology can improve extraction, it cannot reduce the minimum energy required for the mining process. This increased energy use will contribute to the total amount of CO2 and other GHGs emitted in the process of extracting the ores required to realize a low-carbon future. Trade-Off Between CO2 Emissions And Economic Development A recent Reuters analysis highlights the gap between EM and DM from the perspective of their renewable energy transition priorities.8 Of the 17 UN Sustainable Development Goals (SDGs), “Taking action to combat climate change” takes precedence over the rest for DM economies. This is largely because they have already dealt with other energy and income intensive SDGs such as improvements in healthcare and poverty reduction. The large scale of unmet energy demand in developing countries poses a huge challenge to controlling CO2 emissions. The populations of these countries are growing fast and are projected to continue increasing over the next three decades. Rising populations, make the issue of a "green-energy transition" extremely dynamic – i.e., not only do EM economies need to replace existing fossil fuels, but they also need to add enough extra zero-emission fuel sources to meet the growth in energy demand. Bottom Line: Coupled with the increased amount of energy required to mine the same amount of metal (due to lower ore grades), rising energy demand resulting from a burgeoning population in EM economies - which use fossil fuels to meet their primary needs - will require more metals to be mined for the renewable energy transition. This will further increase the amount of carbon dioxide and other greenhouse gas emissions from mine activity, and increase the risk to indigenous populations living close-by to the sources of this new metals supply. ESG risks will increase as a result, presenting greater challenges to attracting funding to these efforts.   Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com   Commodities Round-Up Energy: Bullish OPEC 2.0 was expected to stick with its decision to return ~ 2mm b/d of supply to the market at its ministerial meeting Wednesday. Markets remain wary of demand slowing as COVID-19-induced lockdowns persist and case counts increase globally. The production being returned to market includes 1mm b/d of voluntary cuts by Saudi Arabia, which could, if needs be, keep barrels off the market if demand weakens. Base Metals: Bullish Front-month COMEX copper is holding above $4.50/lb, after breaching its 11-year high earlier this week. The proximate cause of the initial lift above that level was news of a strike by Chilean port workers on Monday protesting restrictions on early pension-fund drawdowns, according to mining.com. After a slight breather, prices returned to trading north of $4.50/lb by mid-week. Last week, we raised our Dec21 COMEX copper price forecast to $5.00/lb from $4.50/lb. Separately, high-grade iron ore (65% Fe) hit record highs, while the benchmark grade (62% Fe) traded above $190/MT earlier in the week on the back of lower-than-expected production by major suppliers and USD weakness. Steel futures on the Shanghai Futures Exchange hit another record as well, as strong demand and threats of mandated reductions in Chinese steel output to reduce pollution loom (Chart 8). Precious Metals: Bullish Rising COVID cases, especially in India, Brazil and Japan are increasing gold’s safe-haven appeal (Chart 9). The US CFTC, in its Commitment of Traders (COT) report for the week ending April 20, stated that speculators raised their COMEX gold bullish positions. At the end of the two-day FOMC meeting, the Fed decided against lifting interest rates and withdrawing support for the US economy. However, officials sounded more optimistic about the economy than they did in March. The decision did not give any sign interest rates would be lifted, or asset purchases would be tapered against the backdrop of a steadily improving economy.  Net, this could increase demand for gold, as inflationary pressures rise. As of Tuesday’s close, COMEX gold was trading at $1778/oz. Ags/Softs: Neutral Corn and bean futures settled down by mid-week after a sharp rally earlier. After rising to a new eight-year high just below $7/bushel due to cold weather in the US, and fears a lower harvest in Brazil will reduce global grain supplies, corn settled down to ~ $6.85/bu at mid-week trading. Beans traded above $15.50/bu earlier in the week, their highest since June 2014, and settled down to ~ $15.36/bu by mid-week. Attention remains focused on global supplies. The uptrend in grains and beans remains intact. Chart 8 Chart 9   Footnotes 1     Please see Renewables, China's FYP Underpin Metals Demand, published 26 November 2020, for further discussion.  It is available at ces.bcaresearch.com. 2     Please see Global Energy Review 2021, the IEA's Flagship report for April 2021. 3    Please see Renewables, China's FYP Underpin Metals Demand, published 26 November 2020, for further discussion.  It is available at ces.bcaresearch.com. 4    We discussed these capex issues in last week's research, Copper Headed Higher On Surge In Steel Prices, which is available at ces.bcaresearch.com. 5    Please see Valenta et al.’s ‘Re-thinking complex orebodies: Consequences for the future world supply of copper’ published in 2019 for this analysis. 6    Please see Calvo et. al.’s ‘Decreasing Ore Grades in Global Metallic Mining: A Theoretical Issue or a Global Reality?’ published in 2016 for this analysis. 7     Please see Azadi et. al.’s ‘Transparency on greenhouse gas emissions from mining to enable climate change mitigation’ published in 2020 for this analysis. 8    Please see John Kemp's Column: CO2 emission limits and economic development published 19 April 2021 by reuters.com.   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 Cryptocurrencies have a long march ahead to be able to displace fiat currencies. While cryptocurrencies are improving tremendously as a medium of exchange, they lag fiat as a store of value and a unit of account. Contrary to popular belief, fiat money has outperformed anti-fiat assets over time as a store of value. Many central banks will replicate the advantages and success of bitcoin through the issuance of central bank digital currencies (CBDCs). Cryptocurrencies are unlikely to disappear anytime soon and can be wonderful speculative investments. However, conservative investors should stick with gold and silver. Feature Chart I-1Spectacular Returns From Cryptocurrencies The rise in the prices of various cryptocurrencies1 has taken many investors by surprise. $1000 invested in bitcoin at the start of 2012 is worth around $10 million today. If you were lucky enough to get in on the first day of trading, when it was worth a fraction of a cent, your initial $1000 investment will be worth around $60 billion today. Meanwhile, many other cryptocurrencies are also sporting legendary returns, not even replicable in the most obscure corners of the options market (Chart I-1). There is some merit to cryptocurrencies, or more specifically, blockchain technology that is the bedrock of their invention. In this decentralized, peer-to-peer system, the need for an intermediary to validate transactions and arbitrate disputes is eliminated. This can greatly reduce transaction costs, especially when compared to banking/legal fees. The autonomy and anonymity that comes with their use is also a desirable feature. For example, anti-fiat enthusiasts welcome the fact that the creation, distribution, and use of cryptocurrencies is outside the purview of central banks. As this asset class continues to garner popularity and capture the imagination of investors, the implications run the gamut from potential future returns (or losses) to the impact on other asset classes. For currency investors, the key question is whether any of these seemingly attractive features have a sizeable impact on the value and use of other developed market currencies. In short, will cryptocurrencies displace fiat? To answer this question, we have to start from the very basic definition of what money is.  Is Bitcoin Money? The three basic functions of money are a store of value, unit of account and a medium of exchange. On at least two of these three basic functions, bitcoin fails. Bitcoin has been improving as a medium of exchange. The ability to swap fiat currency into bitcoins and back is fairly easy. More importantly, more and more merchants are accepting bitcoin as a form of payment. Globally, the turnover of cryptocurrencies is about $200 billion or roughly 3% of overall foreign exchange turnover. This is higher than daily trading in the Mexican peso, the New Zealand dollar, and the Swedish krona, an impressive feat (Chart I-2). This is also evidenced by the rise in the market capitalization of cryptocurrencies, to around $2 trillion today (Chart I-3). Chart I-2An Improving Medium Of Exchange Chart I-3Gold Versus Cryptocurrencies However, as Peter Berezin, our Chief Global Strategist has pointed out, this does not necessarily trump the use of fiat money.2  The Visa network, for example, handles over 5,000 times more transactions a second than the bitcoin mempool (the pool of unconfirmed transactions). Meanwhile, if one were to take a vacation in exotic places like Manila or Mumbai, what medium of exchange will one hold? Cryptocurrency, gold or the US dollar? Experience tells us you will be much better off holding greenbacks or even gold. Bitcoin is certainly not a store of value. The drawdown in cryptocurrency prices has been around 80% a year or 40%-50% over three months. This is much more volatile than currencies such as the Turkish lira or Argentinian peso, from countries fraught with political instability and economic fragility (Chart I-4). It appears that the lack of central bank oversight is a vice and not a virtue. Stability in a currency allows for confidence in savings, future purchases, and investment decisions. A monetary system based on cryptocurrencies deprives citizens of this basic tenet.   Chart I-4Bitcoin Is A Poor Store Of Value Bitcoin’s inherent volatility also makes it unsuitable as a unit of account. Prices quoted in bitcoin units will need to be revised daily. Although not a parallel comparison, this is reminiscent of hyperinflationary Zimbabwe, where retail store prices were adjusted several times a day to reflect the rapid depreciation in the currency. This is hardly a monetary regime suitable for the developed world, or any other economy for that matter. In a nutshell, cryptocurrencies do not yet satisfy the basic functions of money. Yes, they are portable, divisible, fungible and in limited supply. However, they have yet to gain wider acceptance, and are not a store of value nor a unit of account. As such, they remain speculative investments rather than money. The Demise Of Fiat Is Exaggerated Even if bitcoin is not money, the question remains whether it should be held in currency portfolios as insurance against fiat money debasement. After all, central bank quantitative easing since the global financial crisis has benefited other monetary assets such as gold and silver. Should investors also accumulate cryptocurrencies? The answer will depend on the type of investor. Dedicated currency investors need not worry about bitcoin. As a starting point, the US dollar very much remains the reserve currency today. About 60% of global reserve allocation is in USD. This position has often been challenged over the last few decades but has never been threatened (Chart I-5). This puts cryptocurrencies a long way from the starting line. Chart I-5The US Dollar Remains King It is worth noting that over time, fiat assets have done much better than anti-fiat alternatives. Using Bank of England data from the 19th century, we can see that over time, government bonds did much better than gold, or even stocks and real estate (Chart I-6). The reason is that most currencies provide a yield, while cryptocurrencies and gold do not. Chart I-6Fiat Versus Anti-Fiat Assets Chart I-7The DXY Has Faced Strong Resistance At 100 If one is worried about the path of the US dollar (like us), there are many other established fiat currencies to choose from. Since 2015, global allocation of FX Reserves to US dollars has fallen from almost 66% to around 60% today. The rotation has favored other currencies such as the Japanese yen, Chinese yuan and even gold (Chart I-7). From a longer-term perspective, this will place a durable floor under developed market currencies. Cryptocurrencies Versus Gold 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. Central banks have a natural imperative to defend fiat currencies, since these are the very tools they use to implement monetary policy. As such, when diversifying out of dollars, their choice is other fiat currencies or gold, the latter having been a monetary standard for centuries. Private investors, some wanting to cut the cord to a centralized monetary system, may chose cryptocurrencies. Since the peak in the DXY index in 2020, both gold and US Treasuries are down significantly, while bitcoin has catapulted to new highs (Chart I-8). This has occurred because of a change in leadership, where the biggest sellers of US Treasuries have not been official concerns, but private investors (Chart I-9). Foreign central banks still dominate the holding of US Treasuries, to the tune of 60% versus 40% for private investors (bottom panel). But the bulk of outflows has been coming from private investors. Chart I-8Bitcoin Thrives When Mainstream Havens Are Rolling Over Chart I-9A Treasury Liquidation From ##br##Private Investors Central banks (the biggest holders of US Treasuries) tend to have stronger hands. This is because central banks are ideological while private investors can be swayed by momentum. For example, China and Russia have a geopolitical imperative to diversify out of dollars. As a result, Russia now has almost 25% of its foreign exchange reserves in gold and China almost 4%. A conservative investor looking to diversify out of fiat currency should naturally choose gold, which is backed by strong buyers. For more speculative investors, a simple rule of thumb could work: Buy cryptocurrencies when they drop 50% and sell when they overtake their previous highs. As we showed in Chart I-3, cryptocurrencies drop at least 40%-50% every year or so, providing ample opportunity to accumulate long positions. It is worth noting that my colleagues have a different approach. Dhaval Joshi, who heads our Counterpoint product, suggests holding cryptocurrencies in inverse proportion to their relative volatility to gold. In other words, given that bitcoin is three times more volatile than gold, your anti-fiat portfolio should have a 25% allocation to cryptocurrencies.3 Peter Berezin, our Chief Global Strategist, will not touch bitcoin. We tend to agree that cryptocurrencies could be a playable mania but would not recommend this asset class for the longer term. Central Bank Digital Currencies   One argument for why cryptocurrencies may not survive over the longer term is that there is a natural limit to how much widespread acceptance they will achieve before central banks start clamping down on them. The first reason will be due to the loss in seigniorage revenue for central banks. Between 2009 and 2019, the US and China generated about $140bn a year in seigniorage revenue (Chart I-10). These are non-negligible sums, which the rapid proliferation of cryptocurrencies threaten. Moreover, as the turnover in cryptocurrencies overtakes global trading in various domestic currencies, many countries are moving to ban bitcoin transactions (Table I-1). Chart I-10Seigniorage Revenue Is Significant Table 1A Rising List Of Cryptocurrency Bans Second, the use of cryptocurrencies can encourage the proliferation of illegal activities. This is a well-known flaw, and something governments will push back against. Meanwhile, many central banks are moving to establish their own digital currencies. Some of these could be based off the same blockchain technology that underpins bitcoin. This will provide many of the advantages of using a cryptocurrency without some of the known pitfalls. Map I-1 highlights that most G10 central banks have a digital currency plan. Map I-1Many Central Banks Are Planning A Digital Currency Some advocates for bitcoin point to its limited supply (21 million coins) as evidence for monetary prudence. Even the gold standard had more flexibility, since gold mining expanded about 2% a year. Yet that still proved to be extremely deflationary. A monetary standard that includes both paper currency and CBDCs provides the flexibility that central bankers need to smooth out economic cycles. A bitcoin-based standard will take us back to the middle ages. Once CDBCs become mainstream, the need for alternative cryptocurrencies will not disappear but fall greatly. This will also happen as the number of cryptocurrencies being created will likely balloon, given the very impressive price rallies in recent years. The IPO of Coinbase, an exchange for trading cryptocurrencies, may have heralded the peak in sentiment. Investment Conclusions The dollar faces many headwinds over the next 12 months. A rebound in global growth that begins to favor non-US economies will benefit pro-cyclical currencies. The Federal Reserve’s liquidity injections have assuaged the dollar shortage that held markets hostage last year. Interest rates are now moving against the dollar. Meanwhile, the greenback is expensive (Chart I-11), with a negative balance of payments backdrop. Chart I-11The US Dollar Is Expensive Chart I-12Hold Precious Metals Our favorite vehicles to play against coming weakness in the dollar have been the Scandinavian currencies, precious metals and commodity currencies. Within the precious metals sphere, we like both gold and silver but are short the gold/silver ratio as a hedged trade with little downside and much upside (Chart I-12). In particular, precious metals benefit from reserve diversification out of US dollars. In this light, cryptocurrencies could have intermittent rallies. However, given the regulatory and structural issues they face, we will not be holders for the long term.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 We use bitcoin and cryptocurrencies interchangeably in this text. We do acknowledge that there are various other cryptocurrencies and these are shown in Chart 1. 2 Please see Global Investment Strategy Special Report, "Bitcoin: A Solution In Search Of A Problem," dated February 26, 2021. 3 Please see Counterpoint Strategy Special Report, "Why Cryptocurrencies Are Here To Stay And Bitcoin Is Worth $120,000," dated April 8, 2021. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 March housing starts came in at 1.7 million, versus expectations of 1.6 million. This was a 19.4% month-on-month rise. Building permits were equally strong at 1.8 million for the month of March. The University of Michigan sentiment indicator rose to 86.5 in April from 84.9. The jump in the current conditions component from 93 to 97.2 was noteworthy. Initial jobless claims continue to decline, coming in at 547K for the week of April 17. Existing home sales remained strong at 6 million, even though they fell 3.7% month-on-month. The DXY Index fell by 0.3% this week. Speculators pared back a bit of their bullish positioning on the dollar. The overhang of a risk-off event continues to anchor dollar bulls, but interest rate differentials are now moving against the greenback. Report Links: Arbitrating Between Dollar Bulls And Bears - March 19, 2021 The Dollar Bull Case Will Soon Fade - March 5, 2021 Are Rising Bond Yields Bullish For The Dollar? - February 19, 2021 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent euro area data have been mixed. The trade balance came in at €18.4 billion in February, versus €24.2 billion the previous month. This supported a current account balance of €25.9 billion. Construction output fell 5.8% year-on-year in February. Consumer confidence came in at -8.1 in April, versus -10.8 in March. The euro rose by 0.3% this week. The ECB kept monetary policy on hold this week, leaving the deposit facility rate at -0.5% and the marginal lending facility at 0.25%. This garnered little market reaction. With a few euro area countries under lockdown, this was the correct stance. Covid-19 will continue to dictate the near-term path of policy and the euro, but we remain bullish longer term. Report Links: Relative Growth, The Euro, And The Loonie - April 16, 2021 Portfolio And Model Review - February 5, 2021 On Japanese Inflation And The Yen - January 29, 2021 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data from Japan have been robust. Exports surged 16.1% year-on-year in March. Imports were also robust at +5.7% year-on-year. This boosted the trade balance to ¥298 billion. Tokyo condominiums for sale are rising 45% year-on-year. Supermarket sales rose 1.3% year-on-year in March. This is a tentative but positive sign of a consumption recovery. The Japanese yen rose 0.6% this week. The yen has been the best performing currency this week, a sign that sentiment was overly bearish and the currency was much oversold. Our intermediate-term indicator remains at bombed-out levels and speculators are still short the yen. This provides further upside for this defensive currency. As a portfolio hedge, we are short EUR/JPY. Report Links: The Dollar Bull Case Will Soon Fade - March 5, 2021 On Japanese Inflation And The Yen - January 29, 2021 The Dollar Conundrum And Protection - November 6, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 There was an avalanche of positive data from the UK this week. Rightmove house prices came in at 5.1% year on year in April. The labor report was mixed. While the UK lost 73 thousand jobs in February, this was below expectations of a 145 thousand loss. Core CPI came in at 1.1% in March. The RPI index came in at 1.5% year-on-year, in line with expectations. The CBI business optimism survey came in at 38 in April, versus -22 the previous month. Cable rose by 0.4% this week. The UK economy continues to benefit from its strong vaccination campaign. With the prospect of the rest of the world catching up, this trade is now long in the tooth. In short, we are neutral the pound in the short term, but remain bullish longer-term. Report Links: Portfolio And Model Review - February 5, 2021 The Dollar Conundrum And Protection - November 6, 2020 Revisiting Our High-Conviction Trades - September 11, 2020 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 There was scant data out of Australia this week. The NAB business confidence index came in at 17 in Q1 versus 14 the prior quarter. The Australian dollar fell by 0.6% against the US dollar this week. The Aussie came out of the Covid-19 crisis as one of the best performing currencies, so some measure of consolidation is to be expected. Our intermediate-term indicator continues to blast downward, while sentiment towards the Aussie remains quite elevated. However, we believe that this will be a healthy consolidation in what could prove to be a multi-year bull market in the Australian dollar. Report Links: The Dollar Bull Case Will Soon Fade - March 5, 2021 Portfolio And Model Review - February 5, 2021 Australia: Regime Change For Bond Yields & The Currency? - January 20, 2021 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 There was scant data out of New Zealand this week. CPI came in at 1.5% in Q1, in line with expectations. The Kiwi fell by 0.2% against the US dollar this week. Like Australia, New Zealand has managed the Covid-19 crisis quite well and the new travel bubble between the two countries will help lift economic activity. From a technical perspective however, room for further consolidation in the Kiwi remains. Our intermediate-term indicator continues to drift lower, while speculators are slightly long the cross. In our models, the Kiwi also appears overvalued. We were long AUD/NZD but were stopped out this week for modest profits. We will look to reestablish the trade. Report Links: Portfolio And Model Review - February 5, 2021 Currencies And The Value-Versus-Growth Debate - July 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 The recent data out of Canada has been quite strong. Foreigners continue to flock into Canadian capital markets, to the tune of C$8.5bn in February. Housing starts came in at 335 thousand in March, the highest since the 70s. The Teranet house price index rose 10.8% year-on-year in March. The CPI release for March was better than expected. Headline was at 2.2%, the core median was at 2.1% and the trimmed mean came in at 2.2%. The Canadian dollar rose by 0.3% this week. The Bank of Canada kept rates on hold, but trimmed asset purchases. This follows a very generous budget from the Liberal party earlier this week. The loonie loved the news and Canadian government bonds sold off. We remain bullish CAD/USD on valuation grounds, spillovers from US fiscal stimulus and a constructive oil backdrop.  Report Links: Relative Growth, The Euro, And The Loonie - April 16, 2021 Will The Canadian Recovery Lead Or Lag The Global Cycle? - February 12, 2021 Currencies And The Value-Versus-Growth Debate - July 10, 2020 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 The recent data out of Switzerland has been quite strong. Producer and import prices fell by 0.2% year-on-year in March. This is a tremendous improvement from the previous 1.1% drop. M3 money supply continues to expand at a robust 5.6% clip. Exports rose 4.5% month-on-month in March. Watch exports surged 37% year-on-year. The Swiss franc rose 0.5% this week. The Swiss franc is the second best performing currency this week after the yen. With US interest rates stabilizing, the rationale for CHF carry trades is slowly fading. Our intermediate-term indicator shows the franc at bombed-out levels, and speculators are still short. This provides some margin for further upside. We are long EUR/CHF, but with very tight stops. Report Links: Portfolio And Model Review - February 5, 2021 The Dollar Conundrum And Protection - November 6, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 There was scant data out of Norway this week. Industrial confidence came in at 8.2 in Q1, versus a prior reading of 3.1. The Norwegian krone was flat against the US dollar this week. Norway is setting the tone in terms of what monetary policy and sovereign wealth management could look like for many countries in the coming years. First, the Norges Bank announced they would be testing digital currency solutions over the coming two years. This is the way forward for central banks. Second, the sovereign wealth fund, the biggest in the world, is using its influence to effect policy changes towards the environment. Should the returns from its investments pay off in the years ahead, this could generate powerful repatriation flows for Norway. We are strategically bullish the NOK. Report Links: Portfolio And Model Review - February 5, 2021 Revisiting Our High-Conviction Trades - September 11, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 There was no data out of Sweden this week. The Swedish krona rose by 0.2% this week. Swedish 2-year real rates recently punched above US levels, suggesting downward pressure on the krona should soon be abating. Our intermediate-term indicator suggests weakness in the krona is mostly done, while the currency appears cheap in most of our models. The handicap for Sweden is successfully dealing with the pandemic, after having a model that stood apart from what other countries were following. Over the longer-term, we are bullish SEK, just like the NOK, against both the euro and the dollar. Report Links: Revisiting Our High-Conviction Trades - September 11, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

ハイライト 中国の鋼材需要の急増を受け、建築およびインフラプロジェクトが今年完了するにつれて上海鉄鋼先物が今月初めに5,200人民元/MT弱の史上高近くまで上昇したことから、銅価格はさらに上昇すると見込まれます（今週のチャート）。 銅は今年および来年にかけて実需ベースでの需給不足を記録し、在庫がさらに減少するとともに中国および世界的に銅スクラップの需要を押し上げるでしょう。 銅価格の上昇が続けば、現在の市場での口先介入が需要と価格上昇を抑えられない場合、中国の膨大な国家保有銅在庫（約200万MTと推定される）の一部を当局が放出する可能性があります。 強い鋼材マージンと製鉄所に対する新たな環境規制が高品位鉄鉱石（65% Fe）需要を押し上げており、同品は今週初めに約223ドル/MT弱の史上高を付けました。ベンチマークの鉄鉱石価格（62% Fe）は今週10年ぶり高値で取引され、約190ドル/MT手前でした。 当社は2021年12月の銅価格予想を4.50ドル/lbから5.00ドル/lbに引き上げます。さらに、本日の取引終了時に2022年物CME/COMEX銅をロングし、2023年物CME/COMEX銅をショートするポジションを取ります。より急峻なバックワーデーションを見込んでの取組みです。 特集 中国の唐山（Tangshan）製鉄拠点における汚染削減のための製鉄所稼働率の最大30%削減という政府指示は、建設およびインフラのブームに対応する既に逼迫した市場をさらに引き締めることになります（チャート2）。このブームは鋼材価格、そして結果的に鉄鉱石価格を急騰させました（チャート3）。過去と同様に、これが銅の強気相場の次の局面の舞台を整えます。 今週のチャート 鋼材の急騰が銅価格の更なる上昇を予告 鉄鋼の急騰は銅価格のさらなる上昇を示唆する 鉄鋼の急騰は銅価格のさらなる上昇を示唆する 当社のモデルでは、特に鉄筋（リバー）価格と銅価格の間に強い関係があることが今週のチャートで確認できます。鋼材は建築・インフラプロジェクトの前段階で使われ（鉄筋で補強されたコンクリートや圧延コイル製品など）、その後、完成したプロジェクトには銅が使われます（配線や配管の形で）。 チャート2 銅の強気相場は続く 銅の強気相場は続く 銅の強気相場は続く 建設・建築ブームに加え、製造業の継続的な回復が銅価格の追い風となり、2021年後半の世界的な活動回復がこれをさらに増幅します。チャート4は名目GDP水準と銅価格の関係を示しています。重要なのは、アジア（中国を含む）およびアジア以外の経済成長が銅価格とコインテグレーション（共積分）関係にあることで、すなわち経済成長と工業コモディティは長期的な均衡を共有しており、それが同時変動を説明します。 チャート3 鋼材ブームが鉄鉱石価格を押し上げる 鉄鋼ブームが鉄鉱石価格を押し上げる 鉄鋼ブームが鉄鉱石価格を押し上げる メディア報道はしばしば、中国の政府支出をGDP比で注目しがちです（例：社会融資総額のGDP比）。しかし商品価格動向を説明しようとする際に経済要因が除外されがちです。中国政府が民間部門（財・サービス面）をさらに拡大することに成功すれば、オーガニックな経済成長が中国のコモディティ需要を説明する上でより重要になります。 チャート4 世界経済の成長が銅価格を押し上げる 世界的な経済成長が銅価格を押し上げる 世界的な経済成長が銅価格を押し上げる 当社の銅モデルでは、名目中国GDP、新興アジア（EMアジア）GDPおよびアジア以外の新興国（EM）GDPに加え、鋼材と鉄鉱石価格が銅価格と共積分関係にあることが分かります。これは純粋な経済学的観点から期待される結果です。一方で、これらの工業用コモディティ価格と中国の名目GDPに対する社会融資総額の割合との間には共積分関係（経済的な共動性や共通トレンド）は見られません。これらのモデルにより、銅価格の説明や予測に役立たない偽の関係を回避できます。 チャート5 鉄鉱石・銅の需要はグリーン・エネルギーの整備で増加する 鉄鋼価格の急騰で銅が上昇 鉄鋼価格の急騰で銅が上昇 チャート6 再生可能エネルギーが新規増分発電を主導 銅、鉄鋼価格の急騰を受け上昇へ 銅、鉄鋼価格の急騰を受け上昇へ 長期的には、当社が過去の調査報告で指摘してきたように、分散型再生可能発電の導入、よりレジリエントな電力網、電気自動車（EV）への移行は、鉄鉱石や鋼材といったばら積み需要、および特に銅のようなベースメタルの需要成長の主要な源泉となります（チャート5）。1 すでに再生可能エネルギーは、世界の電力網に追加される新規増分発電の中で最も高い成長セグメントを占めています（チャート6）。 銅供給の増加にはより高い価格が必要 銅供給は短期（2022年末まで）では需要に対応するのが困難であり、再生可能エネルギーとEVの整備は大半がこれから始まる段階にあります。つまり中期（2025年末まで）および長期（2050年）において、需要を満たすためにはかなりの新供給を開発する必要があります。 短期的には、精錬銅の供給面、特に製錬所が半精製品として精製し製造入力にする凝縮物（コンデンセート）レベルが極めて低下しており、中国の製錬所におけるトリートメント料・精製料（TC/RC）の長期的な急落からも確認できます（チャート7）。先週およそ22ドル/MTで、これらの手数料は2013年に中国でのベンチマークTC/RC指数が開始されて以来の最低水準でした（reuters.comによる）。2 チャート7 供給減少で銅のTC/RCが低下、価格を押し上げる 銅のTCRCsが供給減で下落し、価格を押し上げる 銅のTCRCsが供給減で下落し、価格を押し上げる 銅の供給事情はチャート8にも表れており、年次の供給と需要を残高に換算すると、これが在庫市場を介して調整されます。国際銅研究グループ（ICSG）は、鉱山生産は昨年も前年並みで推移し、精銅供給はわずか1.5%の増加にとどまったと推定しています。 チャート8 実需の不足が銅在庫を引き下げる... 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… ICSGの推定によれば消費は2.2%増加し、中国の保税倉庫在庫を調整後の今年の実需ベースの不足は456千MTが見込まれます。これで銅市場は4年連続の実需不足となり、2017年以降の平均不足は約414千MTです。その結果、在庫が再び供給ギャップを埋める頼みとなり、世界の在庫は前年比約25%減と低水準で今後も減少し続けるでしょう（チャート9）。 鉱業の設備投資が弱く、銅鉱石の品位が低下しているため、相当程度の新投資を促すにはより高い価格が必要です（チャート10）。しかし、これらプロジェクトのリードタイムは最良のケースでも5年であるため、鉱山会社は近い将来に最終投資判断を下してプロジェクトを承認する必要があります（チャート11）。 チャート9 ...結果として4年続く実需不足で在庫は低水準 …4年にわたる現物不足を経て低い …4年にわたる現物不足を経て低い チャート10 弱い投資と低下する鉱石品位を是正するにはより高い銅価格が必要 弱い設備投資と鉱石品位の低下を是正するには、銅価格のさらなる上昇が必要だ 弱い設備投資と鉱石品位の低下を是正するには、銅価格のさらなる上昇が必要だ チャート11 新規鉱山稼働までのリードタイムは短縮中だが時間は限られる 銅、鉄鋼価格の急騰で上昇へ 銅、鉄鋼価格の急騰で上昇へ 投資への含意 当社が銅に注目するのは、銅があらゆる再生可能技術に関わり、電気自動車（EV）にとっても重要であり、特にこの技術が広く普及した場合にその重要性が増すという単純な事実によります（チャート12）。 当社は短期・中期・長期の投資期間にわたり銅供給の課題が続くと予想しています。短期対応として、当社は2020年9月10日に2021年12月物銅をロングすることを推奨しており、このポジションは現在39.2%の含み益です。中長期をカバーするために、当社はS&P グローバル GSCI コモディティ・インデックスおよびiShares GSCI コモディティ ダイナミック ロール ストラテジー ETF（COMT）をそれぞれ2017年12月7日と2021年3月12日に推奨しており、これらは現時点でそれぞれ-2.3%および-0.8%となっています。 チャート12 電気自動車の普及が新たな銅需要を生む 鉄鋼価格の急騰で銅が上昇へ 鉄鋼価格の急騰で銅が上昇へ 本日の取引終了時に、上記の銅の需給ストーリーに基づく中期的な機会を捉えるために、2022年物CME/COMEX銅先物をロングし、2023年物CME/COMEX銅先物をショートするポジションを構築します。市場のさらなる引き締まりにより在庫が取り崩され、銅先物カーブのバックワーデーションがより急峻になると予想しています。 短期・中期・長期の当社ポジションに対する主なリスクは、世界的にCOVID-19パンデミックを抑制できないことであり、これは短期的なリスクだと考えています。第二のリスクは、中国国家備蓄局（別名：国家鉱物備蓄局）が保有する戦略的な銅コンセントレート備蓄の大規模放出です。後者のリスクに関して、同局の実際の保有量は不明ですが、約200万MTの範囲にあると考えられています。3 結論： 当社は工業用コモディティ、特に銅に対して強気の立場を維持します。 ロバート・P・ライアン チーフ・コモディティ＆エネルギー・ストラテジスト rryan@bcaresearch.com   コモディティ概要 エネルギー： 強気 米国エネルギー情報局（EIA）によれば、テキサス州は2022年末までに約10GWのユーティリティ規模の太陽光発電を追加する見込みです。テキサスは2020年に本格的に太陽光市場に参入し、2.5GWを導入しました。EIAは今後2年間で年平均約5GWを追加すると見ており、総太陽光容量は約15GW弱になる見込みです。この新規容量の約30%は米国で最も生産性の高い油田があるパーミアン盆地で建設される予定です。比較として、米国の太陽光発電の主要生産州であるカリフォルニアはEIAによれば3.2GWの新規太陽光容量を追加します（チャート13）。2022年末までに、新規太陽光発電の約3分の1がテキサスで追加される見込みで、同州はすでに国内で最大の風力発電地でもあります。風力の発電可能性は夜間に高く、太陽は昼間に最も豊富です。 貴金属： 強気 パラジウム価格は水曜日に約2,876ドル/ozで取引され、2020年2月の過去最高2,875.50ドル/ozを上回り3,000ドル/ozに迫っています。これは世界最大のパラジウム生産者であるロシアの金属メーカー、ノリリスクの生産見通し引き下げが続いているためです（チャート14）。同社は今週、以前の見通しを更新し、鉱山の浸水により銅・ニッケル・パラジウムの鉱山生産が今年最大20%減少する可能性があるとしました。パラジウムはガソリン車の触媒に使われ、世界がCOVID-19由来の需要破壊と自動車の供給を制限している半導体不足から回復するにつれて、自動車販売の回復が見込まれます。加えて、白金族金属（PGM）の生産は南アフリカの電力供給の不安定さにより妨げられており、国内の電力大手が需給調整のために計画停電を実施せざるを得ない状況です。当社は2020年4月23日にパラジウムのロングを推奨して以降、同金属のロングを維持しており、このポジションは35.6%の含み益です。 チャート13 鉄鋼価格の急騰で銅が上昇へ 鉄鋼価格の急騰で銅が上昇へ チャート14 パラジウム価格 パラジウム価格     脚注 1     例として当社が2020年11月26日に発表したレポート「Renewables, China's FYP Underpin Metals Demand」（再生可能エネルギー：中国の五カ年計画が金属需要を支える）をご覧ください。‌ ces.bcaresearch.comで入手可能です。   2     reuters.comに掲載された2021年4月14日付の記事「RPT-COLUMN-Copper smelter terms at rock bottom as mine squeeze hits: Andy Home」を参照してください。この記事は、鉱山と製錬所間の直接取引が10ドル/MT程度まで報告されたことを指摘しており、銅の実需サイドが現状いかに逼迫しているかを示しています。 3    reuters.comに掲載された2021年4月20日付の記事「Column: Supercycle or China cycle? Funds wait for Dr Copper's call」をご覧ください。    投資見解とテーマ 推奨 戦略的推奨 戦術的トレード コモディティ価格と取組の参考表 2021年にクローズしたトレード クローズ済みトレードの要約 より高いインフレが到来 より高いインフレが到来

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Highlights Cryptocurrencies are the ‘digital gold’. Long-term investors should hold cryptocurrencies and gold in inverse proportion to their volatilities. On this basis, cryptocurrencies should take around a quarter of the $15 trillion anti-fiat asset market, taking the bitcoin price to around $120,000. Own a diversified basket of cryptocurrencies, including an eco-friendlier ‘proof of stake’ cryptocurrency such as Ethereum. As cryptocurrencies take a larger share of the anti-fiat market, gold’s massive anti-fiat premium versus silver and platinum will collapse. Structural recommendation: overweight silver and platinum versus gold. Structurally underweight gold miners, both versus other miners and versus the market. Feature Feature ChartEach Time People Thought Bitcoin Was In A Bubble, They Were Wrong This Special Report presents the long-term investment case for cryptocurrencies. It is the transcript of twenty questions and answers that made up a recent conversation with a sceptical client. 1.     I am sceptical of cryptocurrencies. Specifically, I think that bitcoin is dirty, slow, volatile, and impractical. Are you going to convince me otherwise? Yes, I’m going to tell you that those criticisms are misunderstandings, or, at least, irrelevant to the long-term investment case. 2.     Ok, let me ask the $57,000 question. Is bitcoin in a bubble? No, bitcoin is not in a bubble. Though to be clear, its price could fall sharply from its current overbought position. Bitcoin’s price has collapsed by 80 percent on three separate occasions: in 2011, 2014, and 2018. Each time, people said the bitcoin bubble had burst, and each time they were wrong. Each time, bitcoin recouped its losses within a couple of years and went on to new highs. On a long-term horizon, I expect the same to happen again (Feature Chart). Cryptocurrencies Are The ‘Digital Gold’ 3.     So, what is the long-term investment case for owning bitcoin and other cryptocurrencies? Cryptocurrencies are the ‘digital gold’. So long as we have a fiat money system, there will be demand for an ‘anti-fiat’ asset that is a hedge against a debasement of the fiat money system. For decades, the dominant anti-fiat asset has been gold. But cryptocurrencies are the new kid on the block threatening gold’s dominance. So far, cryptocurrencies account for just 10 percent of the $15 trillion anti-fiat market. As this share doubles or trebles, it arithmetically requires a doubling or trebling of cryptocurrency prices. 4.     New cryptocurrencies seem to appear every day. How can the limitless number of cryptocurrencies be compared with gold, whose supply is limited? Although the number of cryptocurrencies is unlimited, the total cryptocurrency money supply is limited by the amount of energy expended to mine them. As a useful analogy, each cryptocurrency is like a separate gold miner. While there could be an unlimited number of gold miners, there could not be an unlimited supply of gold. 5.     But a cryptocurrency has no intrinsic value, right? Right, but a fifty pound note has no intrinsic value either. It’s just a bit of paper. The value of a fifty pound note – or any fiat money for that matter – is the trust that you place in the government and the central bank to maintain its value. Likewise, the value of a bitcoin is the trust that you place in the blockchain to maintain its long-term value – so it’s really like an alternative trust system to the trust you place in the fiat monetary system. In fact, the blockchain is often called ‘the trust machine’. 6.     Yet gold does have an intrinsic value. I can always melt it down and wear it as valuable jewellery, which makes it a superior anti-fiat asset, right? No, this is a misunderstanding. Gold does have an intrinsic value, but it is a small fraction of its $1700/oz price. Gold’s intrinsic value is a small fraction of its $1700/oz price. The proof comes from comparing the precious metal price ratios with their (inverse) mining ratios. For the other precious metals – silver and platinum – the price ratio lines up broadly with the mining ratio, as it should (Chart I-2). But gold is the outlier, trading at a massive premium to its mining ratio. For example, the gold/silver price ratio at 70 compares with a mining ratio of 7.5, a near tenfold premium (Chart I-3). So, most of gold’s value comes from its status as the dominant anti-fiat asset. Chart I-2Platinum To Silver Trades Broadly In Line With Its Mining Ratio Chart I-3Gold To Silver Trades At A Massive Premium To Its Mining Ratio 7.     Hasn’t the gold/silver price ratio always been this elevated? No, through the many centuries that gold and silver had equal monetary status, the gold/silver price ratio tracked its mining ratio of around 15. Gold’s massive premium arose only when it became the dominant anti-fiat asset – first, when the gold standard collapsed in 1931 and then, when the Bretton Woods ‘pseudo gold standard’ collapsed in 1971. Proving that most of the current value of gold is its value as the dominant anti-fiat asset (Chart I-4).  Chart I-4Gold’s Massive Premium Is Due To Its Status As The Dominant Anti-Fiat Asset 8.     But unlike gold, cryptocurrencies trade like extreme risk-assets, so are they suitable for a conservative investor, like me? Conservative investors like you have no qualms holding gold even though it can suffer significant drawdowns, such as a 30 percent loss in 2013 and a near 20 percent loss through the past six months (Chart I-5). Of course, cryptocurrencies can suffer even bigger drawdowns, but this can be addressed by position sizing. Specifically, holding $1 of cryptocurrency for every $3 of gold will equalise the drawdown risks from the two anti-fiat assets. Chart I-5Gold Can Suffer Significant Drawdowns Countering The Counterarguments 9.     Now we come to the elephant in the room. Even if I accept that cryptocurrencies are the ‘digital gold’, mining these cryptocurrencies consumes as much energy as a small country. Isn’t this a huge problem? No, this is another misunderstanding. There is nothing wrong with using energy, and it is up to the market – rather than governments or self-proclaimed experts – to decide how to allocate our energy consumption. Remember that we are becoming less energy-intensive in other parts of our lives, so if the market deems that a certain proportion of energy consumption is well served to secure a superior anti-fiat asset, then that’s fine. Thinking more broadly, intermediation functions like banking and legal services account for around two percent of world GDP, while energy production accounts for five percent. So, if the blockchain could carry out that intermediation more efficiently and securely, then society could justify the blockchain consuming two fifths of the world’s energy. 10.   Ok, but what about the dirty energy that cryptocurrency mining consumes, and the damage it does to the environment? Yes, dirty energy is a problem but let’s address it by banning or taxing dirty energy! And let’s have a fair comparison. Gold mining might consume less energy than cryptocurrency mining, but it devastates the environment via the 99 percent of extracted ore that is dumped as waste, landscape destruction, acid mine drainage, and mercury production. Not to mention the tremendous energy needed to transport gold. None of these dirty issues apply to cryptocurrencies. Ultimately, the blockchain is a force for good because, unlike the internal combustion engine or mining, it can be a hundred percent environmentally friendly. Moreover, compared to the usual ‘proof of work’ protocol to secure a transaction, the emerging ‘proof of stake’ protocol removes the advantage to the most powerful computers, and thereby consumes much less energy. 11.    But the fiat currency system does just fine. And gold does just fine for those who want an anti-fiat currency asset. So, isn’t bitcoin just a ‘solution in search of a problem’? Almost every innovation is a ‘solution in search of a problem!’ Before aeroplanes, weren’t we doing just fine with ships and trains? And before the internet, weren’t we doing just fine with information disseminated by governments and major media and publishing companies? Then the internet decentralised and democratised information, and transformed every aspect of our lives. In the same way, the blockchain, which decentralises and democratises trust, can also transform every aspect of our lives. The same criticisms that are being thrown at the blockchain today were being thrown at the internet in the early 1990s. The same criticisms that are being thrown at the blockchain today were being thrown at the internet in the early 1990s. That the internet was slow, impractical, used mostly by criminals for nefarious purposes, that no reputable company would use it, that nobody would put their personal data or credit card details on it, and so on. I guess this shows that most people cannot comprehend an innovation until they experience its transformative impact. 12.   Ok, I’m all for innovation, but isn’t central bank digital currency a better alternative to cryptocurrency? Absolutely not! The whole point of an anti-fiat asset is that it must be completely immune to government and central bank manipulation. 13.   I still have some worries. First, can’t governments just ban cryptocurrencies? It would be something that I would expect in North Korea, but not in a liberal democracy like the UK or the US. Apart from anything else, it would be counterproductive – because the act of banning the anti-fiat asset would be the very act that would cause a surge in its demand! The better course for governments is to demonstrate, in fair competition, that fiat money is as trustworthy as anti-fiat money. 14.   Ok, what about governments taxing cryptocurrency transactions? Again, I think that the best course of action is for governments not to penalise anti-fiat money. But even if they did impose a transaction tax, it wouldn’t diminish cryptocurrencies’ anti-fiat status. After all, most people don’t own gold to carry out day-to-day transactions with it! 15.    One last worry: could quantum computing wipe out the blockchain and cryptocurrencies? The mathematical protocols would have to become orders of magnitude more difficult, but the over-arching concept of a decentralised peer-to-peer network to validate ownership and transactions would remain.  The Investment Conclusions 16.   Ok, let’s get to the investment conclusions. First, how should I value bitcoin and the cryptocurrency asset-class? The immediate question is, what share of the $15 trillion anti-fiat market should cryptocurrencies take? Our answer is that, in order to equalise drawdown risk, investors should hold cryptocurrencies and gold in inverse proportion to their drawdown magnitudes (or volatility). As cryptocurrency drawdowns tend to be three times as large as gold drawdowns, this means holding $1 of cryptocurrency for every $3 of gold (Chart I-6 and Chart I-7). Chart I-6Drawdowns Suffered ##br##By Bitcoin... Chart I-7...Tend To Be Three Times As Large As Drawdowns Suffered By Gold In other words, based on current volatilities, cryptocurrencies should take around a quarter of the anti-fiat market, or around double the current market share. Assuming a constant market size, and a uniform uplift to all cryptocurrencies, this would double all cryptocurrency prices, taking bitcoin to around $120,000. Cryptocurrencies should take around a quarter of the anti-fiat market, or around double the current market share. Of course, as cryptocurrencies become more established and their volatilities diminish, their share of the anti-fiat market can rise, taking their prices even higher.  17.   Will all cryptocurrencies succeed? No. Just as gold miners take market share from each other, cryptocurrencies will also take market share from one another. Hence, it is important to own a diversified basket of cryptocurrencies. At the very least, it is important to have some exposure to an eco-friendlier ‘proof of stake’ cryptocurrency such as Ethereum. Given its greener credentials, ‘proof of stake’ may take the dominant market share in the coming years.   18.   Will cryptocurrencies eventually replace fiat money? Not necessarily. As previously explained, fiat money and cryptocurrencies are just competing trust systems. So long as governments and central banks maintain our trust in fiat money, there is no reason to replace fiat money. 19.   Does this have any implications for inflation? Yes. With cryptocurrencies as a competing trust system, the only way for governments and central banks to maintain our trust in fiat money is not to debase its value. In other words, cryptocurrencies are the new vigilantes to prevent rampant inflation. 20.   What are the structural implications for gold and other precious metals? As cryptocurrencies take a larger share of the anti-fiat market, gold’s massive anti-fiat premium versus silver and platinum will collapse. Hence, a compelling long-term position is to overweight silver and platinum versus gold (Chart I-8). Chart I-8Structurally Overweight Silver And Platinum Versus Gold Long-term equity investors should underweight gold miners, both versus other miners and versus the market.   Dhaval Joshi Chief Strategist dhaval@bcaresearch.com​​​​​​​

Highlights The Biden administration is combining Trumpian nationalism with a renewed push for US innovation in a major infrastructure bill that is highly likely to become law. Populism and Great Power struggle with China and Russia are structural forces that give enormous momentum to this effort. Don’t bet against it. President Biden’s $2.4 trillion infrastructure and green energy plan has a subjective 80% chance of passing into law by the end of the year, as infrastructure is popular and Democrats control Congress. The net deficit increase will range from $700 billion to $1.3 trillion depending on the size of corporate tax hikes in the final bill. The second part of Biden’s plan, the roughly $2 trillion American Families Plan, has a much lower chance of passage – at best 50/50 – as the 2022 midterm elections will loom and fiscal fatigue will set in. While the US infrastructure package is a positive cyclical catalyst, it was largely expected, and the Biden administration still faces early stress-tests on China/Taiwan, Russia, Iran, and even North Korea. Game theory helps explain why financial markets cannot ignore the 60% chance of a crisis in the Taiwan Strait. A full-fledged war is still low-probability but Taiwan remains the world’s preeminent geopolitical risk. In emerging markets, stay short Russian and Brazilian currency and assets – and continue favoring Indian stocks over Chinese. Feature The “arsenal of democracy” is a phrase that President Franklin Delano Roosevelt used to describe the full might of US government, industry, and labor in assisting the western allies in World War II. The US is reviving this combination of productive forces today, with President Joe Biden’s $4 trillion-plus American Jobs and Families Plan unveiled in Pittsburgh on March 31. The context is once again a global struggle among the Great Powers, albeit not world war (at least not yet … more on that below). The US is reviving its post-WWII pursuit of global liberal hegemony – symbolized by its role, growing once again, as the world’s chief consumer and chief warrior (Chart 1). Biden promoted his plan to build up the US’s infrastructure and social safety net explicitly as a historic and strategic investment – “in 50 years, people are going to look back and say this was the moment that American won the future.”1 It is critical for investors to realize that they are not witnessing another round of COVID-19 fiscal relief. That task is already completed with the Republican spending of 2020 and Biden’s own $1.9 trillion American Rescue Plan Act (ARPA), which together with the vaccine rollout are delivering a jolt to growth (Chart 2). Chart 1America Pursues Hegemony Anew Chart 2Consensus Expects 6.5% US GDP Growth After American Rescue Plan Our own back-of-the-envelope estimates of growth suggest that there is considerable upside risk even under current law (Chart 3). The output gap is also guesstimated here, and it will tighten faster than expected, especially as the service sector revives on economic reopening. Chart 3Back-Of-Envelope: US GDP And Output Gap Show Upside Risk After American Rescue Plan Act (ARPA) A growth overshoot is even more likely considering that the first part of Biden’s proposal, the $2.4 trillion American Jobs Plan consisting mostly of infrastructure and green energy, is highly likely to pass Congress (by July at earliest and December at latest, most likely late fall). Our revised estimates for the US budget deficit show that this bill will add considerably to the deficit in the coming years, peaking in three or four years, thus averting the “fiscal cliff” in 2022-23 and adding to aggregate demand in the years after the short-term COVID-era cash handouts dry up (Chart 4). The net deficit increase will be $700 billion if Biden gets all of his tax hikes and $1.3 trillion if he only gets half of them, according to our sister US Political Strategy. Chart 4US Budget Deficit Will Remain Fat In Coming Years We give Biden’s $2.4 trillion American Jobs Plan an 80% chance of passing through Congress by the end of the year. Infrastructure is broadly popular – as President Trump’s own $2 trillion infrastructure campaign proposal revealed – and Democrats have just enough votes to push it through the Senate via budget reconciliation, which requires zero votes from Republicans. Biden’s political capital is still strong given that his approval rating will stay above 50% as long as Trump is the obvious alternative and the Republicans are deeply divided over their own future (Chart 5).2 The second part of his plan, the $1.95 trillion American Families Plan, is much less likely to pass before the 2022 midterm elections – we would say 50/50 odds at best, if the infrastructure deal passes quickly. Chart 5Biden’s Political Capital Is Sufficient To Pass Another Major Law Of course there are very important differences between Biden’s $2.4 trillion infrastructure plan and the similarly sized proposal that Trump would have unveiled this month had he been re-elected: Biden’s proposal is probably heavier on innovation and research and development, and certainly heavier on unionization and labor regulation, than Trump’s would have been. Biden’s plan integrates infrastructure with sustainability, renewable energy, and climate change initiatives that will help the US catch up with Europe and China on the green front. The plan will consist of direct government spending – rather than government seed money to promote private investment. It will be partially offset by repealing the corporate tax cuts in Trump’s signature Tax Cuts and Jobs Act. Most importantly – from a geopolitical point of view – Biden is making a bid for the US to resume its post-WWII quest for global liberal hegemony. He argued that the US stands at the crossroads of a global choice between “democracies and autocracies” and that rebuilding US infrastructure is ultimately about proving that democracies can create consensus and “deliver for their people.” Autocratic regimes, fairly or not, routinely call attention to the divisiveness of modern party politics in the West and the resulting policy gridlock which produces bad outcomes for many citizens, resulting in greater domestic dysfunction and “chaos.” It is important to note that this bid for hegemony will be more, not less, destabilizing for global politics as it will make the US economy more self-sufficient and insulated from the world. It will intensify the US-China and US-Russia strategic competition while making it more difficult for Biden to conduct bilateral diplomacy with these states given their differences in moral values and frequent human rights violations. What is happening now is the culmination of political shifts that pre-date the pandemic, but were galvanized by the pandemic, and it is of global, geopolitical significance for the coming decade and beyond.3 Biden and the establishment Democrats – embattled by populism on their right and left flanks – are shamelessly coopting President Trump’s “Make America Great Again” nationalism with a larger-than-life, infrastructure-and-manufacturing initiative that emphasizes productivity as well as “Buy American” protectionism. Biden explicitly argued that Americans need to boost innovation to “put us in a position to win the global competition with China in the upcoming years.” At Biden’s first press conference on March 25, he made a similar point about China: So I see stiff competition with China. China has an overall goal, and I don’t criticize them for the goal, but they have an overall goal to become the leading country in the world, the wealthiest country in the world, and the most powerful country in the world. That’s not going to happen on my watch because the United States are going to continue to grow and expand.4 The US trade deficit is set to widen a lot further under this massive domestic buildout. It aims to be the largest government investment program since Dwight Eisenhower’s building of the highways or the Kennedy-Johnson-Nixon space race. But it explicitly aims to diminish China’s role as a supplier of US goods and materials and the US trade deficit already shows evidence of economic divorce (Chart 6). The US is bound to have a larger trade deficit due to its own savings-and-investment imbalances but it has a powerful interest in redistributing this trade deficit to its allies and reducing over-dependency on China, which is itself pursuing strategic self-sufficiency and military modernization in anticipation of an ongoing rivalry this century. Chart 6Biden's Coopts Trump's Trade And Manufacturing Agenda Bottom Line: Biden’s $2.4 trillion American Jobs Plan has an 80% chance of passing Congress later this year with a net increase to the fiscal thrust of between $700 billion and $1.3 trillion, depending on how many and how high the corporate tax hikes. The other $2 trillion social spending part of Biden’s plan has only a 50/50 chance of passage. The infrastructure and green energy rebuild should be understood as a return of Big Government motivated by populism and Great Power competition – it is a geopolitical theme with enormous momentum. The result will be faster US growth and higher inflation expectations, with the upside risk of a productivity boom (or boomlet) from the combination of public and private sector innovation. Investors should not bet against the cyclical bull market even though any increase in long-term potential GDP is speculative. A Fourth Taiwan Strait Crisis And The Cuban Missile Crisis Biden’s American Jobs Plan reserves $50 billion for US semiconductor manufacturing, a vast sum, larger than expectations and far larger than the relatively small public investments that helped revolutionize the US chip industry in the 1980s. But it will take a long time for these investments to pay off in the form of secure and redundant supply chains, while a semiconductor shortage is raging today that is already entangled with the US-China rivalry and tensions over the Taiwan Strait. The risk of a diplomatic or military incident is urgent because the chip shortage exacerbates China’s vulnerabilities at a time when the Biden administration is about to make critical decisions regarding the tightness of new export controls that cut off China’s access to US semiconductor chips, equipment, and parts. If the Biden administration appears to pursue a full-fledged tech blockade, as the Trump administration seemed bent on doing, then China will retaliate economically or militarily. Before going further we should point out that there are still areas of potential US-China cooperation under the Biden administration that could reduce tensions this year (though not over the long run). Biden and Xi Jinping might meet virtually as early as this month to discuss carbon emission reduction targets. Meanwhile China is positioning itself to serve as power-broker on two major foreign policy challenges – Iran and North Korea. Biden expressly seeks Chinese and Russian assistance based on the mutual interest in nuclear non-proliferation. Notably, Beijing’s renewed strategic dealings with Iran over the past month highlight its confidence that Biden does not have the appetite to stick with Trump’s “maximum pressure” but rather will seek to reduce sanctions and restore the 2015 nuclear deal. Hence China will seek to parlay influence over Tehran in exchange for reduced US pressure on its trade and economy (Chart 7). Beijing is making a similar offer on North Korea. Chart 7China Holds The Key To Iran, As With North Korea? Ironically both Iranian and North Korean geopolitical tensions should skyrocket in the short term since high-stakes negotiations are beginning, even though they are ultimately more manageable risks than the mega-risk of US-China conflict over Taiwan. China cannot gain the advanced technology it needs to achieve a strategic breakthrough if the US should impose a total tech blockade, e.g. draconian export controls enforced on US allies. Yet it is highly unlikely to gain the tech by seizing Taiwan, since war would likely destroy the computer chip fabrication plants and provoke global sanctions that would crush its economy. The result is that China is launching a massive campaign of domestic production and indigenous innovation while circumventing US restrictions through cyber and other means. Still, a dangerous strategic asymmetry is looming because the US will retain access to the most advanced computer chips via its alliances and on-shoring, whereas China will remain vulnerable to a tech blockade via Taiwan. This brings us to our chief global geopolitical risk: a US-China showdown in the Taiwan Strait. Highlighting the urgency of the risk, Admiral John Aquilino, the nominee for Commander of the US Indo-Pacific Command, told the Senate Armed Services Committee that China might not wait six years to attack Taiwan: “My opinion is that this problem is much closer to us than most think and we have to take this on.”5 To illustrate the calculus of such a showdown – and our reasons for maintaining an alarmist tone and building up market hedges and safe-haven investments – we turn to game theory. Game theory is not a substitute for empirical analysis but a tool to formalize complex international systems with multiple decision-makers. An obvious yet fair analogy to a US-China-Taiwan crisis is the Cuban missile crisis of 1962.6 The standard construction of the Cuban missile crisis in game theory goes as follows: if the US maintains a blockade and the Soviets withdraw their missiles a compromise is achieved and war is averted; if the US conducts air strikes and the Soviets maintain or use their missiles then war ensues. The payouts to each player are shown in the matrix in Diagram 1. Diagram 1Cuban Missile Crisis, 1962 One concern about this construction is that the payouts may underestimate the costs of war since nuclear arms could be used. We insert a comment into the diagram highlighting that the payouts could be altered to account for nuclear war. Note that this alteration does not change the final outcome: the equilibrium scenario is still US blockade and Soviet withdrawal, which is what happened in reality. If we model a US-China-Taiwan conflict along similar lines, the US takes the role of the Soviet Union while China stands where the US stood in 1962 (Diagram 2). This is a theoretical scenario in which the US offers Taiwan a decisive improvement in its security or offensive military capabilities. However, because of the unique circumstances of the Chinese civil war, in which the victors established the People’s Republic of China in Beijing in 1949 and the defeated forces retreated to Taiwan, China’s regime legitimacy is at stake in any showdown over Taiwan. If Beijing suffered a defeat that secured Taiwan’s independence while degrading Beijing’s regime legitimacy and security, the Chinese regime might not survive the domestic blowback.7 Diagram 2Fourth Taiwan Strait Crisis – What Happens If The US Offers Game-Changing Military Support To Taiwan? Thus we reduce the Chinese payout in the case of American victory. In the top right cell of Diagram 2, the row player’s payout falls from two points (2ppt) in the first diagram to one point (1ppt) in this diagram. This seemingly slight change entirely alters the outcome of the game. Beijing now faces equally bad outcomes in the event of defeat, whereas victory remains preferable to a tie. Therefore as long as China believes that the US will not resort to nuclear weapons to defend Taiwan (a reasonable assessment) then it may make the mistake of opting for military force to ensure victory. Fortunately for global investors the US is not providing Taiwan with game-changing military capabilities, although it is ultimately up to China to decide what threatens its security and the US is in the process of upgrading Taiwan’s defense in an effort to deter Beijing from forceful reunification. Thus the exercise demonstrates why we do not expect immediate war – no game-changer yet – but at the same time it shows why war is much likelier than the consensus holds if the military or political status quo changes in a way that China deems strategically unacceptable. A lower-degree Taiwan crisis should be expected – i.e. one in which the US maintains tech restrictions, offers arms sales or military training that do not upend the military balance, or signs free trade agreements or other significant upgrades to the US-Taiwan relationship.8 We would give a 60% probability to some kind of crisis over the next 12-24 months. The global equity market could at least suffer a 10% correction in a standard geopolitical crisis and it could easily fall 20% if US-China war appears more likely. What would trigger a full-fledged Taiwan war? We would grow even more alarmed if we saw one of three major developments: Chinese internal instability giving rise to a still more aggressive regime; the US providing Taiwan with offensive military capabilities; or Taiwan seeking formal political independence. The first is fairly likely, the second lends itself to miscalculation, and the third is unlikely. But it would only take one or two of these to increase the war risk dramatically. Bottom Line: The Taiwan Strait is still the critical geopolitical risk and Biden’s policy on China is still unclear. Iranian and North Korean tensions will escalate in the short run but the fundamental crisis lies in Taiwan. Since some kind of showdown is likely and war cannot be ruled out we advise clients to accumulate safe-haven assets like the Japanese yen and otherwise not to bet headlong against the US dollar until it loses momentum. Emerging Markets Round-Up In this section we will briefly update some important emerging market themes and views: Chart 8Favor USMCA Over Putin's Russia Russia: US-Russia tensions are escalating in the face of Biden’s reassertion of the US bid for liberal hegemony, which poses a direct threat to Russia’s influence in eastern Europe and the former Soviet Union. Ukraine is expected to see a renewed conflict this spring. The top US and Russian military commanders spoke on the phone for the second time this year after Ukrainian military reports indicated that Russia is amassing forces on the border. We also assign a 50/50 chance that the US will use sanctions to prevent the completion of the NordStream II pipeline from Russia to Germany, an event that would shake up the German election as well as provoke a Russian backlash. The Russian ruble has suffered a long slide since Putin’s invasion of Georgia in 2008 and Crimea in 2014 and the country’s currency and equities have not staged much of a comeback amid the global cyclical upswing and commodity price rally post-COVID. We recommend investors favor the Canadian dollar and Mexican peso as oil plays in the context of American stimulus and persistent Russian geopolitical risk (Chart 8). We also favor developed market European stocks over emerging Europe, which will suffer from renewed US-Russia tensions. Brazil: Brazilian President Jair Bolsonaro’s domestic political troubles are metastasizing as expected – the rally-around-the-flag effect in the face of COVID-19 has faded and his popular approval rating now looks dangerously like President Trump’s did, relative to previous presidents, which is an ominous warning for the “Trump of the South,” who faces an election in October 2022 (Chart 9). The COVID-19 deaths are skyrocketing, with intensive care units reaching critical levels across the country. The president has reshuffling his cabinet, including all three heads of the military in an unprecedented disruption that compounds fears about his willingness to politicize the military.9 Meanwhile the judicial system looks likely (but not certain) to clear former President Luiz Inácio Lula da Silva to run against Bolsonaro for the presidency, a potent threat (Chart 10). Bolsonaro’s three pillars of political viability have cracked under the pandemic: the country remains disorderly, the systemic corruption and the “Car Wash” scandal under the former ruling party are no longer at the center of public focus, and fiscal stimulus has replaced structural reform. Chart 9Brazil: Will ‘Trump Of The South’ Face Trump’s Fate? Our Brazilian GeoRisk Indicator has reached a peak with Bolsonaro’s crisis – and likely breaking of the fiscal spending growth cap put in place at the height of the political crisis in 2016 – while Brazilian equities relative to emerging markets have hit a triple bottom (Chart 11). It is too soon for investors to buy into Brazil given that the political upheaval can get worse before it gets better and a Lula administration is no cure for Brazil’s public debt crisis, though a short-term technical rally is at hand. Chart 10Brazil’s Lula Looks To Be A Contender In 2022? Chart 11Brazil: Policy Risk Peaks, Equities Hit Triple-Bottom Versus EM India: A lot has happened since we last updated our views on India, South Asia, and the broader Indian Ocean basin. Farmer protests broke out in India, forcing Prime Minister Narendra Modi to temporarily suspend his much-needed structural reforms to the agricultural sector, while China-backed military coup broke out in Myanmar, and the US election set up a return to negotiations with Iran and the Taliban in Afghanistan. Perhaps the biggest surprise was the Indo-Pakistani ceasefire, despite boiling tensions over India’s decision to make Jammu and Kashmir a federal union territory. The ceasefire is temporary but it does highlight a changing geopolitical dynamic in the region. India and Pakistan ceased fire along the Line of Control where they have fought many times. The ceasefire does not resolve core problems – Pakistan will not stop supporting militant proxies and India will not grant Kashmir autonomy – but it does show their continued ability to manage the intensity of disputes while dealing with the global pandemic. An earlier sign of coordination occurred after the exchange of air strikes in early 2019, which preceded the Indian election and suggested that India and Pakistan had the ability to control their military encounters. India’s move to revoke the autonomy of Jammu and Kashmir in August 2019, along with various militant operations, created the basis for another major conflict this year. After all, the Kargil war in 1999 followed nuclear weaponization, while the 2008 conflict followed the Mumbai attack. But instead India and Pakistan have agreed to a temporary truce. A major India-Pakistan conflict would be a “black swan” as nobody is expecting it at this point. Not coincidentally, India and China also reduced tensions after the flare-up in their Himalayan territorial disputes in 2020. China may be reducing tensions now that it no longer has to distract its population from Trump and the US election. China is shifting its focus to the Myanmar coup, another area where it hopes to parlay its influence with a Biden administration preoccupied with democracy and human rights. Sino-Indian tensions will resume later, especially as China continues its infrastructure construction at the farthest reaches of its territory for the sake of economic stimulus, internal control, and military logistics. The Biden administration is adopting the Trump administration’s efforts to draw India into a democratic alliance. But more urgently it is trying to withdraw from Afghanistan and cut a deal with Iran, which means it will need Indian and Pakistani cooperation and will want India to play a supportive role. Typically India eschews alliances and it will disapprove of Biden’s paternalism. For both China and Pakistan, making a temporary truce with India discourages it from synching up relations with the US immediately. Still, we expect India to cooperate more closely with the US over time, both on economic and security matters. This includes a beefed up “Quad” (Quadrilateral Security Dialogue) with Japan and Australia, which already have strong economic ties with India. Biden’s attempt to frame US foreign policy as a global restoration of democracy and liberalism will not go very far if he alienates the largest democracy in the world and in Asia. Nor will his attempt to diversify the US economy away from China or counter China’s regional assertiveness. Therefore Biden will have to take a supportive role on US-India ties. We are sticking with our contrarian long India / short China equity trade (Chart 12). India cannot achieve its geopolitical goals without reforming its economy and for that very reason it will redouble its structural reform drive, which is supported by changing voting patterns in favor of accelerating nationwide economic development. India will also receive a tailwind from the US and its allies as they seek to diversify production sources and reduce supply chain dependency on China, at least for health, defense, and tech. Meanwhile China’s government is pursing import substitution, deleveraging, and conflict with its neighbors and the United States. While Chinese equities are much cheaper than Indian equities on a P/E basis, they are not as pricey on a P/B and P/S basis (Chart 13) – and valuation trends can continue under the current macro and geopolitical backdrop. Indian equities are more volatile but from a long-term and geopolitical point of view, India’s moment has arrived. Chart 12Contrarian Trade: Stick To Long India / Short China Bottom Line: Stay long Indian equities relative to Chinese and stay short Russian and Brazilian currencies and assets. These views are based on political and geopolitical themes that will remain relevant over the long run but are also seeing short-term confirmation. Chart 13Indian Stocks Not As Over-Priced On Price-To-Book, Price-To-Sales Investment Takeaways To conclude we want to highlight two investment takeaways. First, while the market has rallied in expectation of the US stimulus package, Biden must now get the package passed. This roller coaster process, combined with the inevitable European recovery once the vaccine rollout gets on its feet (Chart 14), will power an additional rally in cyclicals, value stocks, and commodities. This is true as long as China does not tighten monetary and fiscal policy too abruptly, a risk we have highlighted in previous reports. Chart 14Europe's Vaccination Problem While the US is pursuing “Buy American” provisions within its stimulus package, its growing trade deficit shows that it will be forced to import goods and services to meet its surging demand. This is beneficial for its nearest trade partners, Canada and Mexico, and Europe – as well as China substitutes further afield in some cases. Our European Investment Strategist Mathieu Savary has pointed out the opportunities lurking in Europe at a time when vaccine troubles and lockdowns are clouding the medium-term economic view, which is brightening. He recommends going long the “laggard” sectors and sub-sectors that have not benefited much relative to “leaders” that rallied sharply in the wake of last year’s stimulus, vaccine discovery, and defeat of President Trump (Chart 15). The laggard sectors are primed to outperform on rising US interest rates and decelerating Chinese economy as well (Chart 16). Therefore we recommend going long his basket of Euro Area laggards and short the leaders. Chart 15Europe’s Laggards And Leaders Chart 16Macro Forces Favor The Laggards over the Leaders Chart 17Will OPEC 2.0 Maintain Production Discipline To Keep Oil Supplies Tight? Commodities – especially base metals – will continue to benefit from the global and European reopening as well as the US infrastructure buildout, assuming that China does not shoot its economy in the foot. Our Commodity & Energy Strategy highlights that global oil prices should remain in a $60-$80 per barrel range over the coming years on the back of tight supply/demand balances and ongoing OPEC 2.0 production management (Chart 17). We continue to see upside oil price risks in the first half of the year but downside risks in the second half. The US pursuit of a deal with Iran may trigger sparks initially – i.e. unplanned supply outages – but this will be followed by increased supply from Iran and/or OPEC 2.0 as a deal becomes evident.   Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com   Footnotes 1 White House, "Remarks by President Biden on the American Jobs Plan," Pittsburgh, Pennsylvania, March 31, 2021, whitehouse.gov. 2 A bipartisan bill is conceivably, barely, since Republicans face pressure to join with such a popular bill, but they cannot accept the corporate tax hikes, unionization, or green boondoggles that will inevitably occur. 3 The pandemic and President Trump’s hands-off attitude toward it helped galvanize this revival of Big Government, but the revival was already well on its way prior to the pandemic. 4 White House, "Remarks by President Biden in Press Conference," March 25, 2021, whitehouse.gov. 5 Again, "the most dangerous concern is that of a military force against Taiwan," though he implied that Beijing would wait until after the February 2022 Winter Olympics before taking action. He requested that the US urgently increase regional military defense. See Senate Armed Services Committee, "Nomination – Aquilino," March 23, 2021, armed-services.senate.gov. 6 At that time the Soviet Union stationed nuclear missiles in Cuba that threatened the US homeland directly and sent a convoy to make the missile installation permanent. The US imposed a blockade. A showdown ensued, at great risk of war, until the Soviets withdrew and the Americans made some compromises regarding missiles in Turkey. 7 Note that this was not the case for the US in 1962: Cuba did not have special significance for the legitimacy of the American republic and the American regime would have survived a defeat in the showdown, although its security would have been greatly compromised. 8 Taiwan is proposing to buy a missile segment enhancement for its Patriot Advanced Capability-3 missile defense system for delivery in 2025, though this is not yet confirmed by the Biden administration. See for example Yimou Lee, "Taiwan To Buy New U.S. Air Defence Missiles To Guard Against China," Reuters, March 31, 2021, reuters.com. 9 See Monica Gugliano, "I Will Intervene! The Day Bolsonaro Decided To Send Troops To The Supreme Court," Folha de São Paulo, August 2020, piaui.folha.uol.com.br.

特別レポート

The inflation/deflation debate has been dominating the news flow and we are compelled to offer our thoughts in two-part series of Special Reports on this widely discussed, but also widely misunderstood topic. Over the past year, we have been inundated with countless questions about our outlook on inflation given the dual monetary and fiscal stimuli that have been ongoing since Covid-19 hit (Chart 1). We take this opportunity to provide detailed answers on everything inflation in this series of Special Reports. Specifically, in this first report we focus on the long-term and structural forces behind US core CPI inflation. We go in depth into the drivers behind the current deflationary trend and also examine what other variables might break that trend in the future. We also try to ignore the medium-term outlook because the inflation story is well-known as the financial media is littered with charts that slice and dice the ISM manufacturing release in every possible way showing that inflation will rebound. Hence, there is no disagreement about the medium-term path for the core CPI inflation. Chart 12020 Stimuli The important question that we look to answer in this Special Report is whether this rebound is a paradigm shift that will push the US into a new era of consistently high (i.e. above 3%/annum) core CPI inflation, or is it a merely counter trend inflationary spike within the broader deflationary megatrend? Laying The Groundwork Before we wrestle with the structural forces behind inflation, first we must get the question of quantitative easing (QE) and its effects on the real economy and inflation out of the way. Undoubtedly, QE is an integral part of any discussion about the real-word and/or financial asset price inflation, and while it tickles the public’s imagination with hyperinflationary fears, the reality is that those fears are largely misplaced (Chart 2). In fact, pundits have established a consensus: “QE only affects the financial economy as it increases bank reserves that can never escape in the real economy. On the other hand, fiscal stimulus affects the real economy and can cause genuine inflation.” There clearly hasn’t been any material inflation since the GFC, so the argument of “QE only affecting the financial economy” appears to be correct, but at closer look there is room for a different interpretation. What is important to understand is that QE is nothing but a tool, sometimes a signaling tool, in the Fed’s arsenal, and like any tool, it can be used in different ways. Chart 2Boogeyman?  The fact that there has not been any material real-world inflation since the housing bubble is neither because QE is structurally deflationary nor because it “cannot touch” the real economy, but because policy makers chose to use the QE tool to rescue creditors (the financial sector) rather than debtors (the real economy) during the GFC. Delving deeper in the Great Recession, the banks were largely undercapitalized with cash accounting for a tiny portion of overall assets and Treasury holdings being at historic lows (Chart 3). The rest of the assets were tied to loans and other risky securities. Once NINJA loans and other subprime loans along with the derivative CLOs/CDOs house of cards began imploding, the banking sector could not stomach the losses owing to the nonexistent cash buffer, and the entire system went into insolvency mode. This is when the Fed stepped in with QE (and the Treasury with TARP in order to recapitalize the banks) to bail out the nervous system of the US economy by boosting reserves and giving freshly printed money to the banks in exchange for their Treasurys, MBS and other risky securities. By providing support to the banking system, the Fed was counterbalancing a deflationary financial industry shutdown (the Richard Koo balance sheet type recession) rather than injecting an inflationary real economic stimulus. As a result, nearly all of the newly created money was stuck in the financial system in the form of new reserves, and as far as the real economy was concerned, no new money entered directly into the real world. This is how the consensus of “QE only affecting the financial economy” was formed, and why we did not observe a long-lasting rise in CPI despite all of the GFC-brought about stimuli. Chart 3Banks Were Well-capitalized Fast-forward to today, and the backdrop could not be more different. The banking sector was well capitalized, so doing an aggressive QE to boost reserves and to stimulate the financial sector would have only provided marginal benefits. The deflationary shock came through the real economy, not the financial economy, meaning that a real (i.e. fiscal) stimulus was needed. Once again, the QE tool comes to the rescue. This time however, QE was also used to finance Main Street stimulus programs as the Fed bought long dated Treasury (and other) securities that pushed interest rates to rock bottom levels and helped facilitate government stimulus spending. Consequently, a more meaningful fraction of QE money reached Main Street and had an effect on the real economy and was not just locked in new reserves. As a reminder, when rates fall to zero and the Fed embarks on QE, the lines between monetary and fiscal policies get blurred. When QE (instead of the foreign or private sectors) is used to facilitate government expenditures, which later on gets distributed into the real economy, QE can provide inflationary support and can reach the real economy. Chart 42008 Versus Today Perhaps the best way to illustrate the difference between 2008 and 2020 is by showing M2 money supply data. The spike in M2 data in 2020 dwarfs the one in 2008; in 2020 QE money reached the real economy and ended up in private sector’s bank accounts (thus contributing to M2 growth), whereas in 2008 QE money was mainly locked in bank reserves. True the money multiplier and M2 money stock velocity are still in hibernation, and were we to see a sustainable inflationary impulses both of these indicators would have to show signs of life (Chart 4). So does this mean that there are grounds for longer-term inflationary concerns since in 2020 QE actually reached the real economy? To answer this question, we now dig deeper into the secular inflation forces and split them in two camps: pro-inflationary and anti-inflationary. Pro-Inflationary Driver #1: The Buenos Aires Consensus Our view since last June has been that fiscal deficits are here to stay as far as the eye can see and the shift from the Washington to the Buenos Aires Consensus1 is a paradigm shift with staying power. The most important long-term consequence of the Buenos Aires Consensus will be higher inflation. And we are not talking just the asset price kind – which investors have enjoyed over the past decade – but of the more traditional flavor: consumer price inflation. Crudely put, as long as fiscal support remains in place (proverbial helicopter drop, Chart 5) after the pandemic is long forgotten it can serve as a meaningful catalyst for structural inflation, instead of being a one-off counterbalancing short-term boost. To reiterate just how much more powerful fiscal spending is outside of a recession, we conduct a labor market analysis and show that a large percentage of the present-day stimulus is being used to counterbalance the deflationary pandemic shock, rather than contributing to driving inflation higher. Table 1 shows our proxy for total payroll losses incurred by America households as a direct result of the pandemic. Our estimate is $501 billion from March 2020 until today. Chart 5Helicopter Checks The Committee for a Responsible Federal Budget also publishes detailed statistics on the dollar flow of every pandemic stimulus program to a specific economic sector. As of today, US households received $1,400 billion, but some of the stimulus categories simply defer a payment that households still have to make in the future, instead of injecting brand-new money. After stripping those categories out, we arrive to a cleaner number of roughly $1,000 billion – that is how much new money US households received. Next, we subtract our total payroll loss proxy resulting into a net inflow of approximately $500 billion or 2.3% of 2020 US GDP. This is a respectable sum and 2.3% is significant. However, it has one major drawback. The 2.3% GDP stimulus number assumes that every single dollar was actually spent into the real economy, which we know is not true. Table 1The Counterbalancing Effect A recent New York Fed study on how American households used their stimulus money concluded that: “36.4% of the stimulus money was used to boost savings, 34.5% to paydown debt, 25.9% was spent on essentials and non-essentials, and finally the rest of the money (3.2%) was donated”. It is worth noting that this study also looked at the expected spending patterns for the new round of stimulus checks, and the results were generally the same. To obtain a more realistic number of how much of the net $500 billion inflow actually entered the economy, we multiply it by 25.9% (how much money was used on spending according to the NY Fed) and arrive at a better estimate of $130 billion or 0.6% of 2020 US GDP, which is by no means an astronomical number that will shatter into pieces the current deflationary megatrend. This empirical exercise demonstrated how a large percentage of the present-day stimulus is being used to counterbalance the deflationary pandemic shock. However, if our thesis of a Buenos Aires Consensus in which governments spend even outside of recessions pans out, then there will not be the aforementioned counterbalancing effect, and all the fiscal dollars will go straight to contributing to rising inflation until the deflationary megatrend is broken. Pro-Inflationary Driver #2: Demographics In the long run, inflation tends to oscillate alongside a country’s demographics. More specifically, it is the relative size of the three age cohorts (young, working-age, and old) that plays a key role in driving inflation. People who are in the working-age cohort are at their peak productivity, which implies that their contribution to the production of goods and services is greater than the demand for new credit they generate, meaning that they produce a deflationary pull. The opposite is true for the other two age cohorts (the young and the old). Neither one is contributing to the production of goods & services, while both still generate new credit in the economy (for example student loans), and the end result is an inflationary pull. Hence, it is the interplay between these three age cohorts that serves as a structural force behind inflation. To put some numbers behind this conceptual framework, we turn our attention to a paper “The enduring link between demography and inflation” written by Mikael Juselius and Előd Takáts. In the paper, the authors conduct rigorous cross-country analysis and find that indeed, people 30-60 years of age (the working-age cohort) exert deflationary pressure, while the other two cohorts contribute to rising inflation. Chart 6 plots the age-structure effect for the US against inflation. The authors also quantified that over the 40-year period (1970-2010) the increase in the working-age population (due to baby-boomers) has lowered inflationary pressures by almost five percentage points in the US (Chart 7). Meanwhile, by extrapolating the likely path of demographic data by 40 years (2010-2050), the authors observed a shift from deflationary to inflationary age pressure mainly due to the incoming increase in the proportion of the old cohort. Their estimate of the expected pull on inflation in the US will be approximately two and a half percent (Chart 8). Chart 6Demographics Are A Mighty Force Chart 7From Deflationary... Chart 8...To Inflationary Going forward, US demographics will be more inflationary than deflationary. Pro-Inflationary Driver #3: De-Globalization The “apex of globalization” or “de-globalization” is our third pro-inflationary driver. We have written about this theme extensively at BCA Research and it is the mega-theme of our sister Geopolitical Strategy (GPS) service. Odds are high that countries will continue looking inward as the US sustains its aggressive trade policy, China’s trend growth slows, and US-China strategic tensions intensify. Chart 9 shows that we are at the conclusion of a period of tranquility. Pax Americana underpinned globalization as much as Pax Britannica before it. The US is in a relative decline after decades of geopolitical stability allowed countries like China to rise to “great power” status and rivals like Russia to recover from the chaos of the 1990s. Chart 9The Tide Is Turning De-globalization has become the consensus since the election of Donald Trump. But Trump is not the prophet of de-globalization; he is its acolyte. And now, President Biden is continuing in Trump’s footsteps. Globalization is ending because of structural factors, not cyclical ones. And its decline was pre-written into its “source code.” Three factors stand at the center of this assessment, first outlined in a 2014 GPS Special Report, “The Apex Of Globalization – All Downhill From Here”: multipolarity, populism and protectionism. Events have since confirmed this view. The three pillars of globalization are the free movement of goods, capital, and people across national borders. We expect to see marginally less of each in the future and this should prove inflationary. Pro-Inflationary Driver #4: US Dollar Bear Market The path of least resistance is lower for the US dollar and it represents our final pro-inflationary driver. Chart 10 highlights the ebbs and flows of the trade-weighted US dollar since it floated in the early-1970s. The DXY index has moved in six-to-ten year bull and bear markets. The most recent trough was during the depths of the Great Recession, while the peak was in early-2020. If history repeats, eventually the dollar will mean revert lower in the 2020s, especially given the fiscal profligacy (Buenos Aires Consensus) of the current administration that may continue into 2024. Chart 10Time For A Downcycle? True, the US dollar remains the global reserve currency, but that exorbitant privilege is clearly fraying on the edges as the balance-of-payments dynamics are heading in the wrong direction. While the US Congressional Budget Office (CBO) expects some normalization in the US budget deficit over the next 4 years since the pandemic shock will be over, looking further into the future the CBO forecasts a further reacceleration in deficit spending. Assuming a stable to grinding lower current account deficit in the next several years, the path of least resistance is lower for the currency. BCA’s US dollar model also corroborates the twin deficit message and suggests ample structural downside for the USD (Chart 11).  The apex of globalization will also hurt the greenback in a reflexive manner. In a world where all the markets are integrated, borrowers in EM nations often use the reserve currency to issue liabilities at a lower cost. This boosts the demand by EM central banks for US dollar reserves to protect domestic banking systems funded in USD. Moreover, some countries like China implement pegs (both official and unofficial) to the US dollar in order to maintain their competitiveness and export their production surpluses to the US. To do so they buy US assets. If the global economy becomes more fragmented and the Sino-US relationship continues to deteriorate structurally as we expect, then these sources of demand for the dollar will recede. Overlay the widening US current account deficit, and you have the perfect recipe for a depreciating trade-weighted US dollar. Importantly, the 1970s is an interesting period to examine in more detail. As the Nixon administration floated the greenback this aggravated the inflationary pressures (Chart 12) that were building all along the 1960s when the US adopted the Mutually Assured Destruction Doctrine along with the Cold War space race that eventually saw the US landing on the moon in 1969. Chart 11A Bearish Outlook Chart 12The Greenback In The 1970s A lower greenback is synonymous with rising commodity and import prices and given that the US is the consumer of last resort (70% PCE), the commodity/import price pendulum will swing from a deflationary to an inflationary force. Anti-Inflationary Driver #1: Technology’s Creative Destruction Schumpeter’s “creative destruction” forces dominate technology companies in general and Silicon Valley in particular, and represent our fist anti-inflationary driver. These creative destruction forces in the tech industry are inherently deflationary. As a result, tech business models have evolved to thrive during disinflationary periods. Chart 13 shows the software sector deflator derived from national accounts, and since the mid-1980s more often than not it has been mired in deflation. US semiconductor prices, computer hardware prices, and almost any tech related category from the PCE, PPI and CPI releases looks more or less the same as software, underscoring that this is a technology sector wide modus operandi. More recently, Uber Technologies and Airbnb, to name a few, continually bring existing capacity online and that adds another layer of deflation forces at work in select industries they operate in. Tack on technology infiltrating finance and soon the extremely opaque health care services industry that comprises almost 20% of US GDP or $4tn and a deflationary impulse will likely reverberate across these large segments of the US economy that have managed to sustain high pricing power over the decades. Chart 13Technological Progress Is Deflationary Thus, these creative destruction processes remain alive and well in tech land and will continue to exert deflationary/disinflationary pressure (of the good kind) on the US economy. Anti-Inflationary Driver #2: Income & Wealth Inequality The growing trend in income and wealth inequality is our second anti-inflationary force. We first want to focus on the issue of income inequality as it leads to wealth inequality. Income inequality refers to the distribution of wages and profits generated by the economy. It is the proverbial “share of the pie” that households from different socioeconomic brackets receive. The link with inflation comes through the marginal propensity to save statistic of those different brackets. Lower income households have nearly nonexistent propensity to save as they live paycheck to paycheck. Therefore, any additional income inflow they receive gets immediately syphoned into the real economy. In contrast, the top 10% have a high propensity to save as all of their living expenses are well covered, so any additional income they receive is stashed away into savings and does not enter the real economy. This is why following the Trump’s tax cut that benefitted the top 10% there has not been a durable spike in CPI inflation. The fact that in the US the income share of the top 10% is growing at stratospheric rates at the same as time as the bottom 90% are struggling to cover even a $400 unexpected expense needs no introduction. The exact reasons as to why that happened would require a separate Special Report, but one of the main reasons is the multi-decade suppression of unions, which does not allow employees to bargain effectively for a larger slice of corporate profits. Given that profits are an exact mirror image of labor expenses, it is not surprising that the union movement is being marginalized (Charts 14 & 15). Staying on the topic of inflation, as we already outlined, when the lower and medium socioeconomic brackets receive more income, it does not disappear in the savings accounts, but instead it is redirected into the real economy causing a healthy inflationary uptick. Chart 14No Power = No Money Chart 15The Tug Of War​​​​​​​ Chart 16 shows the wealth share of the top 10% of American households on inverted scale. Since the 1920s, inflation and the wealth share of the top 10% has moved in opposite directions. There were two distinct periods when the wealth share of the bottom 90% rose: from the early 1930s until the early 1950s, and from the mid-1960s until the mid-1980s. Both of these periods were accompanied by rising CPI inflation. Chart 16Wealth Equality Is Inflationary At the same time, when looking at any other period outside of those golden days for the bottom 90%, US inflation was anemic. This empirical evidence further underscores the importance of income and wealth distribution in the economy, and given the current US political and economic realities, we do not expect any material changes in labor dynamics to take root. The top 10% will continue benefitting at the expense of the bottom 90%, which will keep US CPI inflation suppressed. Concluding Thoughts In this Special Report our goal was to look beyond the already known medium term inflation outlook, and present both sides of the argument about the long-term inflation trend. We took a deep dive into six structural forces behind inflation that we identified. Four of those forces were pro-inflationary, while the remaining two were anti-inflationary (Table 2). We also assigned a value on our subjective strength scale for each force. Each value incorporates how quickly a particular force will come to fruition, and how strong it will be over the next 5-to-10 year period. Based on our analysis, we conclude that there are rising odds that the deflationary megatrend has run its course and has reached an inflection point of turning inflationary. Table 2Inflation Dots In the next Special Report from our Tinkering With Inflation series, we will conduct a thought experiment and explore a world in which our forecasts prove to be accurate, and a new inflationary paradigm engulfs the US economy. Under such a backdrop what will the US equity sector winners and losers, especially given the related shift in the stock-to-bond correlation? Stay tuned.   Arseniy Urazov Research Associate ArseniyU@bcaresearch.com   Footnotes 1     Buenos Aires Consensus is our catchall term for everything that is opposite of the Washington Consensus: less globalization, fiscal stimulus as far as the eyes can see, erosion of central bank independence, and a dirigiste (as opposed to laissez-faire) approach to economics that seeks to protect “state champions,” stifles innovation, and ultimately curbs productivity growth.

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Dear client, Next week, in lieu of our weekly report, I will be hosting a webcast on Tuesday, March 30 at 9:00 am HKT and Tuesday, March 30 at 10:00 am EDT. In the webcast, I will share our outlook on China’s post-pandemic economic and policy dynamics. Best regards, Jing Sima, China Strategist   Highlights China is aiming for a massive adoption of new energy vehicles (NEVs) to help achieve its 2030 peak carbon dioxide emissions target. The country’s NEV share of total vehicle sales will likely rise significantly to 40% in 2030, from only 5.4% in 2020. This will translate into a compound annual growth rate (CAGR) of 24%-25% in Chinese NEV sales in this decade. China will become increasingly competitive and important in the global NEV supply chain. The country will maintain its leading position in global electric vehicle battery production while reducing its dependence on imported auto chips.   The Chinese NEV production/sales boom will likely reduce the country’s crude oil consumption while increasing the country’s copper demand during 2021-2030. It will also impact more positively on nickel and lithium demand than on cobalt demand. The Chinese NEV stocks could be a good long-term investment, but we recommend waiting for a better entry point. Feature China's production and sales of new energy vehicles (NEVs) have ranked first in the world for six consecutive years. The country’s NEV sales quadrupled during 2015-2020, propelled by supporting policies such as significant amounts of subsidies to buyers.  We believe China will continue to be the leader in both global NEV sales and production this decade. The country’s NEV production and sales will get supercharged by continuing favorable polices and increasing consumers’ interest in NEVs. Many market-driven factors, including falling NEV prices, longer driving range per charge, rapid expansion in the NEV charging/battery-swapping network, as well as new functions including autonomous driving and more software applications-based services, will accelerate NEV adoption in China during 2021-2030. According to the country’s NEV development roadmap, the NEV share of total vehicle sales in China aims to rise to at least 40% in 2030, from only 5.4% in 2020. This will likely translate to a compound annual growth rate (CAGR) of 24%-25% in Chinese NEV sales in this decade. In 2030, the NEV sales in units could be eight to nine times its 2020 level, rising from 1.37 million units to 12-13 million units (Chart 1). Benefiting from the massive scale of the domestic NEV market, China will become increasingly competitive and important in the global NEV supply chain. The country will maintain its leading position in global electric vehicle battery production while reducing its dependence on imported auto chips. The Chinese NEV production/sales boom will help reduce transportation fuel consumption, leading to less carbon dioxide emissions (Chart 2).  Chart 1Chinese NEV Sales: A Supercharged Decade Ahead Chart 2China: Booming NEV Sales Reduce Oil Demand, Leading To Less CO2 Emissions In addition, the country’s copper demand will likely be increase due to booming NEV production during 2021-2030. Meanwhile, the impact will be more positive on nickel and lithium demand than on cobalt demand. Given such  significant growth ahead for the Chinese NEV market, we believe Chinese NEV-related stocks are a potential good buy, but we recommend waiting for a better entry point.   China’s NEV Market: A Supercharged Decade Chinese NEV market is entering a supercharged decade (Box 1). Box 1 Our Forecast Of China’s NEV Sales In 2030 Our estimates of China’s NEV sales in 2030 were derived from two assumptions. First, we assume the NEV share of total Chinese automobile sales in 2030 to be 40%. Based on last October’s report, “Technology Roadmap 2.0 for Energy-Saving and New Energy Vehicles,” published by the China Society of Automotive Engineers (China-SAE), the China-SAE projects that NEVs will account for at least 40% of total automobile sales in China in 2030. The China-SAE is under the supervision of the Ministry of Industry and Information Technology (MIIT). Second, as car ownership – the share of households owning one car – has already risen to over 50% in China, we assume the CAGR of the country’s automobile sales will slow to 1.5%-2.5% in the next decade from 3.4% in the past decade. Based on this assumption, China’s automobile annual sales will likely increase to 29-32 million units in 2030. What Are The Underlying Drivers For Such Significant Growth? First, the interest in buying a NEV is rapidly growing in China. In a September 2020 survey done by Roland Berger, 80% of surveyed potential car buyers in China were considering buying an electric vehicle as their next car, the highest among major economies (Chart 3). Last year, this surveyed number for China was only 60%. We believe this shift in buying intention will continue and will consequently translate into a boom in NEV sales during 2021-2030. NEV battery costs have decreased by nearly 90% since 2010 and will continue to fall (Chart 4). This will drive down average NEV selling prices as the battery in general accounts 40-45% of the total production cost of NEVs, thereby making them more appealing to buyers. Chart 3China: Rising Interest In NEV Purchases Chart 4NEV Battery Costs Will Continue To Fall The average driving range per charge for NEVs will continue to rise. The average driving mileage per charge in China has nearly doubled, from 190km in 2016 to 360km in 2019.1 Currently, a growing proportion of NEV vehicles on the market can even achieve a mileage of 600km and above with a single charge. This is already comparable to traditional gasoline-powered vehicles, which can also cover approximately 600km per fuel tank.  More models with a wide range of selling prices will soon be on the market. Last June, the cheapest electric car with a selling price of only RMB 28,800 (about US$4,000) was released into the Chinese market. Since then the sales of this model have quickly surpassed the Tesla Model 3 to become the hottest seller in China. This shows consumer enthusiasm for affordable NEVs. In the meantime, the success of Tesla electric cars in China demonstrated Chinese consumers’ strong interest in high-quality and expensive NEVs. Chart 5China Has The Most NEV Models In The World Chart 5 shows that China is the country with most electric vehicle models in the world. The number of available electric vehicle models  was 227 in China in 2019, significantly higher than all other individual countries. According to McKinsey, more than 250 new battery electric vehicle (BEV) and plug-in hybrid electric vehicle (PHEV) models will be introduced in the next two years alone. Most of these models will likely be sold in China, adding more purchase options for Chinese consumers. Faster charging time for EV batteries as well as expanding charging/battery-swapping networks are in the making. This will greatly reduce recharge waiting time for NEV drivers. Chart 6Chinese NEV Charging Infrastructure: The Rapid Expansion Will Continue Based on the data from the China Electric Vehicle Charging Infrastructure Promotion Alliance (EVCIPA), the number of both public and private charging poles has increased significantly from 2015 to 2020. In addition,  the number of private ones has already exceeded the number of public ones each year since 2017 (Chart 6). The rapid expansion in the country’s charging station network will continue. The number of total charging poles will likely rise from 1.7 million units to the government’s target of 5 million units in 2025. In addition, Wood Mackenzie last May forecasted this number could reach 9.8 million units in 2030. Roland Berger last September reported that the number of charging locations per 100 km of roadway was about 6.1 in China, significantly higher than 2.2 in Germany and 0.5 in the US (Chart 7). In terms of the number of charging stations per 1000 NEVs, China has also significantly exceeded other major automobile producing countries (Chart 8). Chart 7The Number Of Charging Locations Per 100 km Of Roadway Is Higher In China Than In Many Other Countries… Chart 8…The Same Is True Of The Number Of Charging Stations Per 1,000 NEVs Meanwhile, the Chinese government is also promoting an expansion of battery-swapping networks. The Chinese auto manufacturer Nio has been the leader in this area. The company currently has a network of 178 battery-swapping stations located in and between major cities such as Beijing and Shenzhen; by the end of the year, it plans to have 500 stations. The battery-swapping time for the Nio EV now can be as fast as 90 seconds, even faster than fueling up with gasoline. EVs will become increasingly equipped with functions such as autonomous driving and more software applications-based services. EVs will also become more integrated with intelligent and interactive networks. All these features will make EVs more attractive to automobile buyers.  Second, with the 2030 target for peak emissions, the Chinese authorities will likely continue to develop favorable polices for the domestic NEV sector. China’s key policy support tools for NEVs include tax reductions, direct subsidies to manufacturers, consumer subsidies, and mandated government procurements. In the past, China has provided immense support for NEVs by spending billions of dollars on direct subsidies to manufacturers2 and on consumer subsidy programs.3 In the future, the country’s policy focus will be on NEV charging/battery-swapping network development as well as on NEV-related technology research and investment. For example, since 2019, auto manufacturers have received credits for each NEV produced. The credits take into consideration factors such as the type of vehicle, as well as its maximum speed, energy consumption, weight, and range. This measure will encourage NEV automakers to put more emphasis on technological change. These government supports of technology and network development, coupled with strong interest in NEV purchases by domestic consumers, should offset the impact of the government’s reduced direct subsidies for NEV production and sales. China has reduced overall direct subsidies to both NEV manufacturers and consumers, and vehicles must meet minimum technical and performance criteria to qualify. In 2021, subsidies will be reduced by 20% on NEVs for personal use, and by 10% on NEVs for public transport, including buses and taxis, from their respective 2020 level. In addition, NEV subsidies and tax exemptions will expire at the end of 2022 and subsidies will be limited to 2 million NEVs per year from 2020 to 2022. A vehicle price limit for passenger cars of CNY300,000 has also been introduced. The NEV subsidy level is currently less in China than in European countries as well as in the US, showing the Chinese NEV market’s diminishing dependence on subsidies. Bottom Line: The country’s NEV production and sales will get supercharged by continuing favorable polices and by increasing consumer interest in NEVs during 2021-2030. We expect China’s NEV sales to reach 12 to 13 million units in 2030, eight to nine times its 2020 level of 1.37 million units. Growing China’s Competitiveness In The Global NEV Supply Chain The global NEV market has two main subsectors – plug-in hybrid electric vehicles (PHEV) and battery electric vehicles (BEV). The former can be operated in either the electric-powered mode or internal-combustion engines (ICE) mode. The BEVs can only run in electric mode and are also called pure electric vehicles. Traditional ICE vehicle manufacturers from Europe, US, Japan, and South Korea have more competitive advantages in the global PHEV subsector supply chain due to their long-term dominance in the global traditional ICE vehicle market. Chart 9BEVs Account For Over 80% Of Chinese NEV Sales China has been putting more focus on the new BEV market as it has enabled a level playing field with traditional ICE vehicle players. Hence, China has stronger competitiveness in the global BEV subsector. BEVs account for approximately 82% of Chinese NEV sales (Chart 9). According to China-SAE, this ratio could reach 95% by 2035 as China will increase its development of the BEV market and the adoption of BEV vehicle options.   We expect China’s competitiveness will continue to grow along the global NEV supply chain, especially in the BEV subsector. Having the largest domestic NEV market in the world gives China the advantage of attracting NEV manufacturers and building a more integrated global supply chain. During 2017-2020, accumulated world NEV sales were about 8.8 million units, with the largest share of 49% coming from China, higher than 31% for Europe and 14% for the US (Chart 10).   China is the largest NEV battery producer in the global NEV supply chain. The battery is the most important component of a NEV, and its technological progress holds the key to transitioning away from fossil fuel dependence. Data shows that six out of the world’s top ten NEV battery producers are Chinese companies, together accounting for 41% of global battery sales in kwh last year (Chart 11). Chinese company CATL has been the largest NEV battery producer for the past four years. Chart 10China Has The Largest NEV Market In The World Chart 11Chinese Companies: Major Players In The Global NEV Battery Market The development of charging/battery-swapping infrastructure will continue to be faster in China than in other countries/regions due to the country’s much larger scale of EV users and related policy support. This allows China to collect more NEV charging-related data, which may be used to improve the country’s NEV manufacturing process, charging pole production, and the country’s charging infrastructure development.  The development of the 5G network is much more advanced in China than in any other countries. This allows NEV makers to work closely with IT/internet companies such as Huawei, Baidu, Tencent and Alibaba to test integrated applications such as the autonomous driving and AI functions of NEVs. This will help promote the technology advancement related to NEVs in all aspects in China. Chart 12Chinas NEV Net Exports Are Set To Go Up Due to its competitive advantages, China has become a net exporter of electric vehicles (Chart 12). In 2019, Chinese NEV sales abroad accounted for only 1.7% of the world total in US dollar terms, far below the US (31%), Germany (15%), and South Korea (9%). We expect growing competitiveness will allow China to gain share in global NEV exports. The area China needs to work on the most along the NEV supply chain is the design/manufacturing of automotive chips. There is still no Chinese company among the top ten global auto chip semiconductor companies based on sales revenue (Chart 13). Chart 13China’s Greatest Weaknesses Lie In Automotive Chip Design/Manufacturing Non-Chinese companies account for about 90% of the global auto chip supply while China contributes no more than 5%. The current automotive chip shortage has done much more severe damage to automakers in China than in any other country. Bloomberg recently reported the global auto industry might lose US$61 billion of 2021 sales from chip shortages, with 42% of the losses from China. In the recent National People’s Congress, the Chinese government reiterated the importance of addressing this weak link, with an urgency on reducing the country’s dependence on foreign auto chips. Bottom Line: China will become globally more competitive in the NEV supply chain. Impact On Commodity Markets The evolution in China’s NEV markets in this decade will have various impacts on commodities such as crude oil, copper, nickel, cobalt, and lithium. During 2021-2030, massive NEV adoption will only modestly reduce Chinese crude oil consumption for the transportation sector, while significant growth in NEV/charging pole/battery production will increase the country’s copper demand. Meanwhile, as NEV battery production requires raw materials including nickel, cobalt and lithium, rapid growth in NEV battery production will also have different impacts on these commodity markets.    Crude oil: In 2019, the total number of vehicles in China was 252.6 million units and the country’s total gasoline and diesel consumption was about 6,800 thousand barrels per day (kbpd) of crude oil equivalent. This equals 26.7 kbpd per 1000 vehicles. Annual NEV sales in China will rise from 1.37 million units in 2020 to about 12 million units in 2030. Assuming all these NEVs are only using their electric battery, this will cut oil consumption/imports by an increasing amount every year, ranging from 50 kbpd in 2021 to 320 kbpd in 2030. The reduction from increased NEV sales will have a relatively minuscule impact on China’s total crude oil imports. A 50-kbpd reduction in 2021 would account for less than half a percent of China’s 2020 crude oil imports. By 2030, this number could potentially rise to 1-3%, but is still insignificant. Copper: An average gasoline powered car uses only about 20kg of copper, while a hybrid car uses about 40 kg and a fully electric car uses roughly 80kg. In addition, NEV batteries and charging station chargers also require copper. Table 1 shows our rough calculation of the copper demand from the expansion of Chinese NEV market. Chinese copper demand may increase by 210 thousand tons in 2021 and by about 1,500 thousand tons in 2030. To put this into perspective, China consumed about 15 million tons of copper in 2020 based on World Bureau of Metal Statistics (WBMS) data. The increase in copper demand in 2021 is only 1.4% of 2020 copper consumption in China. However, when it increases to 1,500 thousand tons in 2030, it will account for 10% of China’s current copper consumption. Table 1China's Copper Demand Due To EV Adoption In 2021 And 2030 Chart 14Chinas NEV Boom Will Have A More Positive Impact On Nickel And Lithium Demand Than On Cobalt Demand Nickel: The NEV battery technology is on a trend to reduce the use of cobalt given its high price and limited supply, while increasing the use of nickel. This will be a long-term positive factor for nickel prices (Chart 14, top panel). Cobalt: EV battery makers are trying to reduce or even avoid the use of cobalt. In the next couple of years, the demand for cobalt will likely remain strong as the technology of non-cobalt batteries is still in the developing stage. Non-cobalt batteries in development include solid-state , lithium-sulphur, sodium-ion and lithium-air batteries. However, cobalt prices may face increasing headwinds in the longer term (Chart 14, middle panel). Lithium: Lithium is a very abundant mineral produced from either brines or hard rock sources, with products from clays also in the pipeline. There is no structural constraint on global lithium production. Lithium prices may remain elevated in the near term but as the supply catches up over a longer run, we expect lithium prices to go down (Chart 14, bottom panel). Bottom Line: The massive growth in the Chinese NEV market in this decade will have a small negative impact on crude oil demand and a more positive impact on commodity demand such as copper, nickel, cobalt, and lithium. However, cobalt may face a substitution risk due to its elevated prices while lithium may face the risk of increasing supply. Investment Implications On NEV-related Stocks Chart 15The Chinese NEV stocks: A Good Long-term Investment, But We Recommend Waiting For A Better Entry Point We believe share prices of the Chinese NEV makers and NEV battery producers will deliver considerable positive long-term returns. The basis for this assumption is that many of them will experience strong revenue growth over this decade. While NEV maker stock prices have recently fallen considerably, we think they are still overpriced and recommend waiting for a better entry point (Chart 15).    Ellen JingYuan He     Associate Vice President ellenj@bcaresearch.com   Footnotes 1Source: “Technology Roadmap 2.0 for Energy-Saving and New Energy Vehicles,” released on October 27, 2020 by the China Society of Automotive Engineers (China-SAE). 2For example, as part of China’s 2012 “Energy-Saving and New Energy Vehicle Industry Development Plan (2012–2020),” the central government allocated over $15 billion to support the development of energy-efficient vehicles and NEVs, pilot car projects, and electric vehicle infrastructure. Source: "Chinese Government Support for New Energy Vehicles as a Trade Battleground", published by The National Bureau of Asian Research" on September 27, 2017. 3For example, the central government had provided 60,000 yuan (approximately $8,700) and 50,000 yuan (approximately $7,250) per car in subsidies for electric vehicles and plug-in hybrid vehicles, respectively, covering 40%–60% of the cost of the vehicle. Local governments also created their own subsidy programs that provided additional discounts for NEV purchases through cash subsidies, free parking, or free license plates. Source: "Chinese Government Support for New Energy Vehicles as a Trade Battleground", published by The National Bureau of Asian Research" on September 27, 2017. Cyclical Investment Stance Equity Sector Recommendations

Highlights The Federal Reserve’s ultra-dovish stance is not the only reason for markets to cheer. The US is booming, China is unlikely to overtighten monetary and fiscal policy, and Europe remains a source of positive political surprises. Still, the cornerstone of this cycle’s wall of worry has been laid: Biden faces a series of foreign policy challenges, the US is raising taxes, China is tightening policy, and Europe’s stimulus is not large enough to qualify as a game changer for potential GDP growth. Stay the course by maintaining strategic pro-cyclical trades yet building up tactical hedges and safe-haven plays. Feature Chart 1US Stimulus, Chinese Tightening, German Vaccine Hiccups The US is turning to tax hikes, China is returning to structural reforms, and Europe is bungling its vaccine rollout. Yet synchronized global debt monetization is nothing to underrate. Especially not in the context of a Great Power struggle that features a green energy race as well as a high-tech race. Governments are generating a cyclical growth boom and it is conceivably that their simultaneous pump-priming combined with a new capex cycle and private innovation could generate a productivity breakthrough. This upside risk is keeping global equity markets bullish even as it becomes apparent that construction has begun on this cycle’s wall of worry. The US dollar bounce should be watched closely in this context (Chart 1). After passing the $1.9 trillion American Rescue Plan Act, which consists largely but not entirely of short-term cash handouts (Chart 2), President Joe Biden’s policy agenda will now turn to tax hikes. Thus far the tax hike proposals are in line with Biden’s campaign literature (Table 1). It remains to be seen whether the market will “sell the news” that Biden is pivoting to tax hikes. After all, Biden was the most moderate of the Democratic candidates and his tax proposals only partially reverse President Trump’s tax cuts. Chart 2American Rescue Plan Act Table 1Biden’s Tax Hike Proposals On The Campaign Trail Nevertheless higher taxes symbolize a regime change in the US – it is very unlikely tax rates will go down anytime soon but they could go easily higher than expected in the coming decade – and the drafting process will bring negative surprises, as Treasury Secretary Janet Yellen highlighted by courting Europe to cooperate on a 12% minimum corporate tax and halt the global race to the bottom in taxes on multinational corporations. At the same time Biden’s foreign policy challenges are rising across the board: China is demanding a rollback of Trump’s policies: If Biden says yes, he will sacrifice hard-won American leverage on matters of national interest. If he says no, the Phase One trade deal will be null and void, as will sanctions on Iran and North Korea, and the new economic sanctions on Taiwan will expand beyond mere pineapples.1 Russia is recalling its US ambassador: Biden vowed to make Russia pay for alleged interference in the 2020 US election and sanctions are forthcoming.2 The real way to make Russia pay is to halt the construction of the Nordstream II natural gas pipeline, which reduces the leverage of eastern European democracies while increasing Germany’s energy dependence on Russia. But Germany is dead-set on that pipeline. If Biden levies sanctions the centerpiece of his diplomatic outreach to Europe will be further encouraged to chart an independent course from Washington (though the rest of Europe might cheer). North Korea is threatening to restart missile tests: North Korea is pouring scorn on the Biden administration for trying to restart negotiations.3 The North wants sanctions relief and it knows that Biden is willing to offer it but it may need to create an atmosphere of crisis first. China would be happy were that to happen as it could offer the US its good services on North Korea instead of concrete trade concessions. Iran is refusing to rejoin negotiations over the 2015 nuclear deal: Biden has about five months to arrange for the US and Iran to rejoin the 2015 nuclear deal. Beyond that he will enter into another long negotiation with the master negotiators, the Persians. But unlike President Obama from 2009-15, he will not have support from Russia and China … unless he sacrifices his doctrine of “extreme competition” from the get-go. It is not clear which of these challenges will be relevant to financial markets, or when. However, with US and global equities skyrocketing, it must be said that the geopolitical backdrop is not nearly as reassuring as the Federal Reserve, which announced on Saint Patrick’s Day that it will not hike interest rates until 2024 even in the face of a 6.5% growth rate and the prospect of an additional, yet-to-be passed $2 trillion in US deficit spending. Herein lies Biden’s first victory. He has stressed that boosting the American economy and middle class is critical to his foreign policy. He envisions the US regaining its global standing by defeating the virus, super-charging the economy, and then orchestrating a grand alliance of European and Asian democracies to write new global rules that will put pressure on China to reform its economy. “I say it to foreign leaders and domestic alike. It's never, ever a good bet to bet against the American people. America is coming back. The development, manufacturing, and distribution of vaccines in record time is a true miracle of science.”4 The pandemic and economic part of this agenda are effectively done and now comes the hard part: creating a grand alliance while China and Russia demonstrate to their neighbors the hard consequences of joining any new US crusade. The contradiction of Biden’s foreign policy is his desire to act multilaterally and yet also get a great deal done. The Europeans are averse to conflict with China and Russia. The Russians and Chinese are not inclined to do any great favors on Iran or North Korea. Nobody is opening up their economy – Biden himself is coopting Trump’s protectionism, if less brashly. Cooperation with Presidents Xi Jinping and Vladimir Putin on nuclear proliferation is possible – as long as Biden aborts his democracy agenda and his trade agenda. We continue with our pro-cyclical investment stance but have started building up hedges as we are convinced that geopolitical risk will deliver a rude awakening. This awakening will be a buying opportunity given the ultra-stimulating backdrop … unless it portends war in continental Europe or the Taiwan Strait. In the remainder of this report we highlight the takeaways from China’s National People’s Congress as well as recent developments in Germany. Our key views remain the same: China will not overtighten monetary/fiscal policy; Biden will be hawkish on China; Germany’s election may see an upset but that would be market-positive. China: No Overtightening So Far China concluded its National People’s Congress – the “Two Sessions” of legislation every year – and issued its 2021 Government Work Report. It also officially released the fourteenth five-year plan covering economic development for 2021-25. Table 2 shows the new plan’s targets as compared to the just expired thirteenth five-year plan that covered 2016-20. Table 2China’s Fourteenth Five Year Plan (2021-25) For a full run-down of the National People’s Congress we recommend clients peruse BCA’s latest China Investment Strategy report. From a geopolitical point of view we would highlight the following takeaways: The Tech Race: China added a new target for strategic emerging industry value added as percent of GDP – it wants this number to reach 17% by 2025 but there is nothing solid to benchmark this against. The point is that by including such a target China is putting more emphasis on emerging industries, including: information technology, robotics, green energy, electric vehicles, 5G networks, new materials, power equipment, aerospace and aviation equipment, and others. China’s technological “Great Leap Forward” continues, with a focus on domestic production and upgrading the manufacturing sector that is bound to stiffen the competition with the United States. China’s removal of a target for service industry growth suggests that Beijing does not want de-industrialization to occur any faster – another reason for global trade tensions to stay high. Research and Development: For R&D spending, previous five-year plans set targets for the desired level. For example, over the last five years China vowed to increase annual R&D spending to 2.5% of GDP. A reasonable expectation for the coming five years would have been a 3% target of GDP. However, this time the government set a target of an annual growth rate of no less than 7% during 2021-2025. The point is that China is continuing to ascend the ranks in R&D spending relative to the US and West in coordination with the overarching goal of forging an innovative and high-tech economy. Unemployment: China has restored an unemployment rate target. In its twelfth five-year plan Beijing aimed to keep the urban surveyed unemployment rate below 5% but over the past five years this target vanished. Now China restored the target and bumped it up slightly to 5.5%. This target should not be hard to meet given the reported sharp decline in urban unemployment to 5.2% already. However, China’s unemployment statistics are notoriously unreliable. The real takeaway is that unemployment will be higher as trend growth slows, while social stability remains the Communist Party’s ultimate prize – and any reform or deleveraging process will occur within that context. The Green Energy Race: China re-emphasized its pledge to tackle climate change, aiming for peak carbon emissions by 2030 and carbon neutrality by 2060. However, no detailed action plans were mentioned. Presumably China will not loosen its enforcement of existing environmental targets. Most of these were kept the same as over the past five years, except for pollution (PM2.5 concentration). Previously the government sought to reduce PM2.5 concentration by 18%. Now the target is set at 10% aggregate reduction, which is lower, though further reduction will be difficult after a 43% drop since 2014. Overall, China has not loosened up its environmental targets – if anything, enforcement will strengthen, resulting in an ongoing regulatory headwind to “Old China” industries. Military Power: Last week we noted that the government’s goals for the military have changed in a way that reinforces themes of persistently high geopolitical tensions. The info-tech upgrades to the People’s Liberation Army were supposed to be met by 2020, with full “modernization” achieved by 2035. However, last October the government created a new deadline, the one-hundredth anniversary of the PLA in 2027 (“military centenary goal”). No specific measures or targets are given but the point is that there is a new deadline of serious importance – an importance that matches the party’s much-ballyhooed centennial on July 1 of 2021 and the People’s Republic’s centennial in 2049. The fact that this deadline is only six years away suggests that a rapid program of military reform and upgrade is beginning. The official defense spending growth target of 6.8% is only slightly bigger than last year’s 6.6% but these targets mask the significance of the announcement. The takeaway is that the Chinese military is preparing for an earlier-than-expected contingency with the United States and its allies. What about China’s all-important monetary, fiscal, and quasi-fiscal credit targets? There is no doubt that China is tightening policy, as we highlight in our updated China Policy Tightening Checklist (Table 3). But will China overtighten? Probably not, at least not judging by the Two Sessions, but the risk is not negligible. Table 3A Checklist For Chinese Policy Tightening The government reiterated that money and credit growth should remain in a reasonable range in 2021, with “reasonable range” referring to nominal economic growth. Chinese economists estimate that the nominal growth rate will be around 8%-9% in 2021. The IMF projection is 8.1%, while latest OECD forecast is at 7.8%.5 Because China’s total private credit (total social financing) growth is inherently higher than M2 growth, we would use pre-pandemic levels as our benchmark for whether the government will tighten policy excessively: If total social financing growth plunges below 12%, then our view is disproved and Beijing is over-tightening (Chart 3). If M2 growth plunges below 8%, we can call it over-tightening. Anything above these benchmarks should be seen as reasonable and expected tightening, anything below as excessive. However, the Chinese and global financial markets could grow jittery at any time over the perennial risk of a policy mistake whenever governments try to prevent excessive leverage and bubbles. As for fiscal policy, the new quotas for local government net new bond issuance point to expected rather than excessive tightening. New bonds can be used to finance capital investment projects. The quota for total new bond issuance is 4.47 trillion CNY, down by 5.5% from last year. Though local governments may not use up all of the quota, the reduction is small. In fact, total local government bond issuance will be a whisker higher in 2021 than in 2020. The quota for net new bonds is only slightly below the 2020 level and much higher than the 2019 level. Therefore the chance of fiscal overtightening is small – and smaller than monetary overtightening. Chart 3China Policy Overtightening Benchmark Chart 4China’s Real Budget Deficit Is Huge China’s official budget balance is a fiction so we look at the IMF’s augmented net lending and borrowing, which reached a whopping -18.2 % of GDP in 2020. It is expected to decrease gradually to -13.8% by 2025. That level will be slightly higher than the pre-pandemic level from 2017-2019 (Chart 4).6 By contrast, China’s total augmented debt is expected to keep rising in the coming years and reach double the 2015 level by 2025. Efforts to constrain debt could lead to a larger debt-to-GDP ratio if growth suffers as a consequence, as our Global Investment Strategy points out. So China will tighten cautiously – especially given falling productivity, higher unemployment, and the threat of sustained pressure from the US and its allies. US-China: Biden As Trump-Lite Chinese and US officials will convene in Alaska on March 18-19. This is the first major US-China meeting under the Biden administration and global investors will watch closely to see whether tensions will drop. So far tensions have not fallen, highlighting a persistent and once again underrated risk to the global equity rally. Biden’s foreign policy team has not completed its review of China policy and Presidents Biden and Xi Jinping are trying to schedule a bilateral summit in April – so nothing concrete will be decided before then. Chart 5US-China: Beijing's Standing Offer The Biden administration is setting up a pragmatic policy, offering areas to engage with China while warning that it will not compromise on democratic values or national interests. China would welcome the opportunity to work with the Americans on nuclear non-proliferation, namely North Korea and Iran, as this would expend US leverage on an area of shared interest while leaving China a free hand over its economic and technological policies. China at least partially enforced sanctions on these countries in response to President Trump’s demands during the trade war and official statistics suggest it continues to do so. Oil imports from Iran remain extremely low while Chinese business with North Korea is, on paper, nil (Chart 5). If this data is accurate then North Korea’s economy has not benefited from China’s stimulus and snapback. If true, then Pyongyang will offer partial concessions on its nuclear program in exchange for sanctions relief. At the moment, instead of staging any major provocations to object to US-Korean military drills, the North is using fiery language and threatening to restart missile tests. This suggests a diplomatic opening. But investors should be prepared for Pyongyang to stage much bigger provocations than missile tests. In March 2010, while the world focused on the financial crisis, the North Koreans torpedoed a South Korean corvette, the Chonan, and shelled some islands, at the risk of a war. The problem under the Trump administration was that Trump wanted a verifiable and durable deal of economic opening for denuclearization whereas the North Koreans wanted to play for time, reduce sanctions, study the data from their flurry of missile tests during the Obama and early Trump years, and see if Trump would get reelected before offering any concrete concessions. Trump’s stance was not really different from Bill Clinton’s but he tried to accelerate the timeline and go for a big win. By Trump’s losing the election North Korea bought four more years on the clock. Chart 6US-China: Biden Lukewarm On China The Biden administration is willing to play for time if it gets concrete results in phases. This would keep North Korea at bay and retain a line of pragmatic engagement with Beijing. But if North Korea stages a giant provocation Biden will not hesitate to use threats of destruction like Clinton and Trump did. The American public is not much concerned about North Korea (or Iran) but is increasingly concerned about China, with a recent Gallup opinion poll showing that nearly 50% view China as America’s greatest enemy and Americans consistently overrate China’s economic power (Chart 6). Biden will not let grassroots nationalism run his policy. But it is true that he has little to gain politically from appearing to appease China. With progress at hand on the pandemic and economic recovery, Biden will devote more attention to courting the allies and attempting to construct his alliance of democracies to meet global challenges and to “stand up” to China and Russia. The allies, however, are risk-averse when it comes to confronting China. This is as true for the Europeans as it is for China’s Asian neighbors, who stand directly in its firing line. In fact, Europe’s total trade with China is equivalent to that of the US (Chart 7). The Europeans have said that they will pursue tougher trade enforcement through the World Trade Organization, which would tie the Biden administration’s hands. Biden and his cabinet officials insist that they will use the “full array” of tools at their disposal (e.g. tariffs and sanctions) to punish China for mercantilist trade policies. Chinese negotiators are said to be asking explicitly for Biden to roll back Trump’s policies. Some of these policies relate to trade and tech acquisition, others to strategic disputes. We doubt that Biden will compromise on the trade issues to get cooperation on North Korea and Iran. But he will have to offer major concessions if he wants durable denuclearization agreements on these rogue states. Otherwise it will be clear that his administration is mostly focused on competition with China itself and willing to sideline the minor nuclear aspirants. Our expectation is that Americans care about the China threat and the smaller threats will be used as pretexts with which to increase pressure and sanctions on China. Asian equities have corrected after going vertical, as expected. But contrary to our expectations geopolitics was not the cause (Chart 8). This selloff could eventually create a buying opportunity if the Biden administration is revealed to take a more dovish line on China, trade, and tech in exchange for progress on strategic disputes like North Korea. Any discount due to North Korean provocations in particular would be a buy. On Taiwan, however, China’s new 2027 military target underscores our oft-recited red flag. Chart 7EU Risk Averse On China Chart 8Asian Equity Correction And GeoRisk Indicators Bottom Line: Investors should stay focused on the US-China relationship. What matters is Biden’s first actions on tariffs and high-tech exports. So far Biden is hawkish as we anticipated. Investors should fade rumors of big new US-China cooperation prior to the first Biden-Xi summit. Any major North Korean aggression will create a buy-on-the-dips opportunity. Unless it triggers a war, that is – and the threshold for war is high given the Chonan incident in 2010. Germany: Markets Wake Up To Election Risk – And Smile This week’s election in the Netherlands delivered a fully expected victory to Prime Minister Mark Rutte’s liberal coalition. The German leadership ranks next to the Dutch in terms of governments that received an increase in popular support as a result of the COVID-19 crisis (Chart 9). However, in Germany’s case the election outcome is not a foregone conclusion. Chart 9German Leadership Saw Popularity Bounce As we highlighted in our annual forecast, an upset in which a left-wing bloc forms the government for the first time since 2005 is likelier than the market expects. This scenario presents an upside risk for equities and bund yields since Germany would become even more pro-Europe, pro-integration, and proactive in its fiscal spending. In the current context that would be greeted warmly by financial markets as it would reinforce the cyclical rotation into the euro, industrials, and European peripheral debt. Incidentally, it would also reduce tensions with Russia and China – even as the Biden administration is courting Germany. Recent state elections confirm that the electorate is moving to the left rather than the right. In Baden-Wurttemberg, the third largest state by population and economic output, and a southern state, the Christian Democrats slipped from the last election (-2.9%), the Social Democrats slipped by less (-1.7%), the Free Democrats gained (2.2%), the Greens gained (2.3%), and the far-right Alternative for Germany saw a big drop (-5.4%). In the smaller state of Rhineland-Palatinate the results were largely the same although the Greens did even better (Tables 4A & 4B).7 In both cases the Christian Democrats saw the worst result since prior to the financial crisis while the Greens tripled their support in Baden and doubled their support in the Palatinate over the same time frame. Table 4AGerman State Elections Show Voters’ Leftward Drift Continues Table 4BGerman State Elections Show Voters’ Leftward Drift Continues To put this into perspective: Outgoing Chancellor Angela Merkel and her coalition have seen a net 6% increase in popular support since COVID-19. The coalition, led by the Christian Democratic Union and its Bavarian sister party, the Christian Social Union, still leads national opinion polling. What we are highlighting are chinks in the armor. The gap with the combined left-leaning bloc is less than 10% points (Chart 10). Chart 10German Party Polling Merkel is a lame duck whose party has been in power for 17 years. She is struggling to find an adequate successor. Her current frontrunner for chancellor-candidate, Armin Laschet, is suffering in public opinion, especially after the state election defeats, while her previous successor was ousted last year. Other chancellor-candidates, like Friedrich Merz, Markus Söder, and Norbert Röttgen may find themselves to the right of the median voter, which has been shifting to the left. Merkel’s party’s handling of COVID-19 first received praise and now, in the year of the vote, is falling under pressure due to difficulties rolling out the vaccine. Even as conditions improve over the course of the year her party may struggle to recover from the damage, since the underlying reality is that Germany has suffered a recession and is beset by global challenges. While the Christian Democrats performed relatively well in the 2009 election, in the teeth of the global financial crisis, times have changed. Today the Social Democrats are no longer in free fall – ever since their Finance Minister Olaf Scholz led the charge for fiscal stimulus in 2019 – while third parties like the Free Democrats, Greens, and Die Linke all gained in 2009 and look to gain this year (Table 5). In today’s context it is even more likely that other parties will rise at the ruling party’s expense. Still, the Christian Democrats have stout support in polls and do not have to split votes with the far-right, which is in collapse. Table 5German Federal Election Results Show 2021 Could Throw Curveball For Ruling Party Therein lies the real market takeaway: right-wing populism has flopped in Germany. The risk to the consensus view that Merkel will hand off the baton seamlessly to a successor and secure her party another term in leadership is that the establishment left will take power (the Greens in Germany are essentially an establishment party). Chart 11German Bunds Respond To Macro Shifts, State Elections Near-term pandemic and economic problems have caused bund yields to fall and the yield curve to flatten so far this year (Chart 11). But that trend is unlikely to continue given the global and national outlook. Election uncertainty should work against this trend since the only possible uncertainty gives more upside to the fiscal outlook and bond yields. If the consensus view indeed comes to pass and the Christian Democrats remain in power, the election holds out policy continuity – at least on economic policy. Fiscal tightening would happen sooner under the Christian Democrats but it would not be aggressive or premature, at least not in the 2021-22 period. It is the current coalition that first loosened Germany’s belt – and it did so in 2019, prior to COVID-19. Germany’s and the EU’s proactive fiscal turn will have a major positive impact on growth prospects, at least cyclically, though it is probably too small thus far to create a structural improvement in potential growth. Fiscal thrust is negative over next two years even with the EU’s Next Generation Recovery Fund being distributed. A structural increase in growth is possible given that all of the major countries are simultaneously pursuing monetary and fiscal stimulus as well as big investments in technology and renewable energy that will help engender a new private capex cycle. But productivity has been on a long, multi-decade decline so it remains to be seen if this can be reversed. Geopolitically speaking, Germany’s and the EU’s policy shift arrived in the nick of time to deepen European integration before divisions revive. Integration is broadly driven by European states’ need to compete on a grand scale with the US, Russia, and China. But Putin, Brexit, and Mario Draghi demonstrate the more tactical pressures: Brexit discourages states from exiting, especially with ongoing trade disputes and the risk of a new Scottish independence referendum; Putin’s aggressive foreign policy drives eastern Europeans into the arms of the West; and the formation of a unity government in Italy encourages European solidarity and improves Italian growth prospects. The outlook for structural reforms is not hopeless. Prime Minister Draghi’s government has a good chance of succeeding at some structural reforms where his predecessors have failed. Meanwhile French President Emmanuel Macron is still favored to win the French election in 2022, which is good for French structural reform. The fact that the EU tied its recovery fund to reform is positive. Most importantly the green energy agenda is replacing budget cutting for the time being, which, again, is positive for capex and could create positive long-term productivity surprises. Of course, structural reform intensity slowed just prior to COVID, in Spain, France, and Italy. Once the recovery funds are spent the desire to persist with reform will wane. This is clear in Spain, which has rolled back some reforms and has a weak government that could dissolve any time, and Italy, where the Draghi coalition may not last long after funds are spent. If the global upswing persists and Chinese/EM growth improves, then Europe will benefit from a macro backdrop that enables it to persist with some structural reforms and crawl out of its liquidity trap. But if China/EM growth relapses then Europe will fall back into a slump. Thus it is a very good thing for Europe, the euro, and European equities that the US is engaged in an epic fiscal blowout and that China’s Two Sessions dampened the risk of overtightening. Incidentally, if the German government does shift, relations with Russia would improve on the margin. While US-Russia tensions will remain hot, German mediation could reduce Russia’s insecurity and lower geopolitical risks for both Russia and emerging Europe, which are very cheaply valued at present in part because they face a persistent geopolitical risk premium. Bottom Line: German politics will drive further EU integration whether the Christian Democrats stay in power or whether the left-wing parties manage a surprise victory. Europe will have to provide more fiscal stimulus but otherwise the global context is favorable for Europe. Investors should not be too pessimistic about short-term hiccups with the vaccine rollout. Investment Takeaways The US is stimulating, China is not overtightening, and German’s election risk is actually an upside risk for European and global risk assets. These points reaffirm a bullish cyclical outlook on global stocks and commodities and a bearish outlook on government bonds. It is especially positive for global beneficiaries of US stimulus excluding China, such as Canada and Mexico. It is also beneficial for industrial metals and emerging markets exposed to China over the medium term, after frenzied buying suffers a healthy correction. Any premium in European equities should be snapped up. However, the cornerstone has been laid for the wall of worry in this global economic cycle: the US is raising taxes, China is tightening policy, and Europe’s fiscal stimulus will probably fall short. Moreover a consensus outcome from the German election would be a harbinger of earlier-than-expected fiscal normalization. There is not yet a clear green light in US-China relations – on the contrary, our view that Biden would be hawkish is coming to pass. Biden faces foreign policy tests across the board and now is a good time to hedge against the inevitable return of downside risks given the remorseless increase in tensions between the Great Powers. Housekeeping A number of clients have written to ask follow-up questions about our contrarian report last week taking a positive view on cybersecurity stocks despite the tech selloff and a positive view on global defense stocks, especially in relation to cybersecurity. The main request is, Which companies offer the best value? So we teamed up with BCA’s new Equity Analyzer to highlight the companies that receive the best BCA scores utilizing a range of factors including value, safety, payout, quality, technicals, sentiment, and macro context – all relative to a universe of global stocks with a minimum market cap of $1 billion. The results are shown in the Appendix, which we hope will come in handy. Separately our tactical hedge, long US health care equipment versus the broad market, has stopped out at -5%. This makes sense in light of the pro-cyclical rotation. Health care equipment is still likely to outperform the rest of the US health care sector amid a policy onslaught of higher taxes, government-provided insurance, and pharmaceutical price caps.   Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com   Yushu Ma Research Associate yushu.ma@bcaresearch.com   Appendix Appendix Table ABCA Research Equity Analyzer Casts Light On Best Defense And Cybersecurity Stocks Appendix Table BBCA Research Equity Analyzer Casts Light On Best Defense And Cybersecurity Stocks Appendix Table CBCA Research Equity Analyzer Casts Light On Best Defense And Cybersecurity Stocks Footnotes 1 China is asking for export controls that have hamstrung Huawei and SMIC to be removed as well as for sanctions and travel bans on Communist Party members and students to be lifted. See Lingling Wei and Bob Davis, "China Plans To Ask U.S. To Roll Back Trump Policies In Alaska Meeting," Wall Street Journal, March 17, 2021, wsj.com; Helen Davidson, "Taiwanese urged to eat ‘freedom pineapples’ after China import ban," The Guardian, March 2, 2021, theguardian.com. 2 "Putin on Biden: Russian President Reacts To US Leader’s Criticism," BBC, March 18, 2021, bbc.com. 3 Pyongyang is likely to test a new, longer range intercontinental ballistic missile for the first time since its self-imposed missile test moratorium began in 2018 after President Trump’s summit with leader Kim Jong Un. See Lara Seligman and Natasha Bertrand, "U.S. ‘On Watch’ For New North Korean Missile Tests," Politico, March 16, 2021, politico.com. 4 See ABC News, "Transcript: Joe Biden delivers remarks on 1-year anniversary of pandemic", ABC News, Mar. 11, 2021, abcnews.com. 5 Please see IMF Staff, "World Economic Outlook Reports", IMF, Jan. 2021, imf.org and OECD Staff, "OECD Economic Outlook, Interim Report March 2021", OECD, March 9, 2021, oecd.org. 6 Please see IMF Asia and Pacific Dept, "People’s Republic of China : 2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the People's Republic of China", IMF, Jan. 8, 2021, imf.org. 7 The other state elections coming up this year will coincide with the federal election on September 26, with one minor exception (Saxony-Anhalt). Opinion polls show the Christian Democrats slipping below the Greens in Berlin and the Social Democrats in Mecklenburg-Vorpommern. The Alternative for Germany is falling in all regions.