The Big Picture: Watch out for continuing supply-chain issues and moving commodity prices this year (Part I)
B. G., Opalesque Geneva
In this interview, Dr. Patrick Welton, founder and CIO of Welton Investment Partners, an alternative asset manager, offers his observations on the major macro themes expected to affect the markets in 2022.
Welton Investment Partners specialises in global macro and ESG; it has $1.3bn in AuM and is based in New York and California. The firm has recently sold a minority stake to Nile Capital Group Holdings, LLC, a private equity firm based in Los Angeles. The financial terms of the transaction were not disclosed.
In part 1, Dr Welton says supply chain issues and their market consequences will continue into 2022, with second, third and fourth waves that won’t necessarily be identical to previous waves, and might show in different places. He also expects a continuation of commodity prices’ ebbing and flowing.
Opalesque: You say that the pandemic has shifted consumption from services to goods in the first wave, and that snarled supply chains will cause secondary and tertiary waves with various delayed propagations. Could you explain?
Pat Welton: The whole world is familiar with the first set of pandemic challenges with respect to the supply chain. These inefficiencies were reflected into the markets in a similar way. The supply chain problem is not just the one dominant difficulty such as purchasing a chip for an automobile for example. As demand and supply imbalances occur, so do the prices of things such as energy that has to be shipped or commodity raw materials like base metals that have to go to a factory but cannot be used efficiently or are in the wrong location. We have seen this all year long as a result of the pandemic.
Supply chain forces will not dissipate in just one wave. The behaviour of all the participants in the global economy mirrors the imperfect information they get. Participants will attempt to speed up production when resolving a fixed supply chain problem. Then new information comes in, or other constraints reveal themselves, and they have to slow down.
One of the most common mathematical analogues of this is a traffic jam on a freeway that alternates between speeding up and slowing back down in waves. It is also similar to ocean waves where you have peaks and troughs separating into sets. It is not just one supply chain problem that will be fixed by one series of global actors. It takes time to unsnarl these problems, and as they unsnarl, secondary and tertiary problems occur and propagate through the economy differently.
Supply chain issues and their market consequences will continue into 2022. We will be seeing second and third and fourth waves, and they won’t necessarily be identical to previous waves. They might show in different places.
Opalesque: How does that link to your portfolio?
Pat Welton: This is a source of opportunity for our portfolio. The fluctuating impacts on economic growth will show up in the investment reactions to growth rates, debt, interest rates and central bank policies.
This affects our global commodity trading across all sectors, and there is an echoing effect on interest rates and currency trading. It also affects our equity trading depending on how global capital market participants will anticipate either government fiscal changes, central bank policy delay or acceleration changes. These all manifest at varying rates as market participants allocate in anticipation of how policymakers will react to these ensnarlments and to the flow of raw data, or consequential data such as producer price inflation, consumer price inflation, or more specifically asset price inflation.
Opalesque: So you see a continuation of commodity pricing ebbing and flowing.
Pat Welton: Yes. There will be few straight lines. For instance, there was a substantial rise in base metals early on, with the resumption of potential growth forecasts This subsequently changed with different sets of policies and reactions. For example, as a global manufacturing hub and infrastructure builder, China’s strong stance of taking public health first with a zero-Covid policy goal and shutting down cities if needed can change demand. The impact on commodity depends on which city is involved as they each have different manufacturing capabilities.
Similarly, you end up having downstream issues with energy usage; even with a decline of such, that affects something like aluminium. A large tonnage of aluminium is smelted in high energy facilities in China that reacted to coal pricing and emission policy reactions. As a result, aluminium had a very strong rally from scarcity, even though the earth’s supply of aluminium had not changed. It is part of these waves.
Opalesque: What about volatility?
Pat Welton: Volatility is a bit different. That’s the dispersion of price. I think it is easier to say prices will be moving up and down in cycles.
The ebb and flow will result from positive economic actors trying to compensate in the economy. As suppliers and transporters try to fix things, other constraints show up. The mini-cycles will definitely affect commodities.
Opalesque: What is your fund’s commodity positioning?
Pat Welton: Our commodity positions are mixed. We are both long and short in different commodities and different sectors. For example, we are long in some parts of the energy spectrum and short in others. It is the same in agricultural commodities and soft commodities. We are mixed. We are variably long in industrial metals but short precious metals.
Welton Global, the firm’s flagship multi-strategy macro program, seeks to deliver returns that are uncorrelated to the major equity and credit market indices. The strategy uses a broad set of proprietary models that trade directional, diversifying, and equity sell-off strategies. The $877m fund has annualised 10.0% since the strategy’s October 2013 inception thru year-end 2021. CY2021 returns were up 15%.
The HFRI Macro Systematic Diversified Index returned 6% in 2021.
(Article reprinted with permission from Opalesque).
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