“Everything is for the best, in this best of all possible worlds”

After the S&P’s largest November rise since 1928, Friday’s downbeat US job creation news and California’s new Covid restrictions led investors to expect $trns more stimulus from Janet Yellen & Jay Powell.


Everything is for the best – Brent crude oil

We focus on Brent as the global benchmark.

Voltaire’s Dr Pangloss is alive and well in today’s oil markets, with Brent up a further $1/bbl on optimism OPEC+ can continue to manage supply. But in reality:

  • Key members such as the UAE now recognise time is running out to monetise their vast reserves
  • It has low finding costs, and needs to sell now – or risk its reserves being left in the ground
  • Yet its current quota means its output is down 20% YOY, versus 12% for Russia and only 4% for Saudi
  • And it knows Joe Biden will accelerate the green agenda, to match European and Chinese commitments

Investors are also ignoring the growing impact of energy abundance on the major oil companies.

As we noted in September, ExxonMobil, once the world’s most valuable company, has been ejected from the Dow Industrials – having joined in 1928. And last week, it took a $20bn writedown on natural gas assets.

EM and Chevron hope their commitment to high dividend payouts will maintain investor loyalty. But their focus on financial metrics mean they risk becoming Losers in today’s New Normal world, whilst rivals ENI, TOTAL, Shell and BP aim to be Winners via major renewable investments.

WATCH FOR: OPEC+ disagreements becoming more public as the downside for fossil fuels becomes more obvious.

S&P 500

Everything is for the best – S and P 500

We focus on the US S&P 500 Index as the world’s major stock market index.

The market rose a further 2% to 3699, but the VIX volatility index was unchanged at 21.

As with oil, Panglossian euphoria is obvious, with the Index above the tramlines that have dominated since 2009:

  • Markets: Vaccine euphoria + the “Fed put” supports the algorithmic-based momentum players
  • Real economy: Structural change + mass unemployment means no return to ‘business as usual’

When today’s euphoria wears off, markets will have to recognise that stimulus cannot create new jobs in the industries of the future.

We also continue our series on FAANMG valuations, using the Ben Graham formula. Amazon is next for analysis:

  • Its P/E is even higher than Facebook’s at 93, suggesting 42% annual growth out to 2030
  • This seems very optimistic as its revenue growth is coming at the expense of margins
  • A flat growth scenario, with a P/E of 8.5, would give it a Graham Value of $358 versus today’s $3162 level

WATCH FOR: Markets to flip into “fear mode” as investors tire of today’s euphoria and focus on the risk of tax rises next year

Interest rates

We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.

The rate jumped to 0.96%, with the MOVE volatility index rising 11% to 44.

Dr Pangloss’s expectation of a quick return to ‘business as usual’ means inflation bulls remain in control. But in reality, the economy is likely to take a major hit in Q1, with the pandemic currently out of control in the USA..

WATCH FOR: The bulls are enjoying their moment in the sun, but we expect downward pressure on interest rates to resume as/when the “greed trade” turns to fear.

China’s recovery

China’s economic recovery continues due to a decade-high boom in factory output and rising household debt – which is set to hit 150% of disposable income by year-end.

But both are only short-term “fixes”. Household consumption at 38% of GDP is only around half of US levels, highlighting the need to rebalance the economy via the ‘dual circulation‘ strategy discussed here in October.

The government sees technology as key to success. And last week saw China debut the new Jiuzhang quantum computer (pictured). It claims to take just 3 minutes to complete a task that would require 600 million years with the world’s fastest conventional machine.

Coupled with such major investments in AI, 5G and robotics, the government is also hoping to develop “grey economic power” by providing free courses on e-commerce and internet for China’s elderly. They will otherwise constitute a major headwind for the rebalancing strategy, as 300 million Chinese will be aged 65+ by 2030.

WATCH FOR: More initiatives to push domestic consumption.

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This Research Note has been prepared by New Normal Consulting GmbH for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. New Normal Consulting GmbH do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, New Normal Consulting GmbH does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by New Normal Consulting GmbH.
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