How to Fix ESG in Impact Alpha
To read the opinion piece on how to fix ESG in Impact Alpha: ESG data is a public good. Let’s open it up.
Full Market Disclosure is the Key to ESG Price Discovery and ESG Market Leadership
I’ve spent the past five months working hard to solve the ESG data and standards problem.
It turns out that the key is to ask the question, “How does one generate ESG price discovery?” And the only way that this problem can be solved is through a radical rethink of how ESG disclosure should work in markets along with a deep consideration of ESG ethics.
The result is blending together a 13F filing with the SOFR (Secured Overnight Financing Rate) price construction and the right mix for ESG price discovery comes together. Oh, and making ESG ratings free for individuals and small organizations.
Ideas – Buy Deep Out of the Money One Year Puts in Size on US Equity Indices, Delta Variant Risk Up
The Australian government initiated a strict two-week lockdown in Sydney this week and its news service laid bare the significant risks of the Delta Variant, implying a much higher risk than is being made clear by governments in Western Europe or the US. We believe the Australian report to be solid as they have a very open, cohesive society.
The exceptionally transmissible Delta Variant is likely to infect everyone until communities hit a population immunity threshold of vaccinated or previously infected. In the United States, 54% of all Americans have had one dose and 46% are fully vaccinated; worryingly, 17 states have first-dose vaccination rates below 50% among 18-year old’s and up. Globally, only 39 countries report having vaccinated more than 40% of their population.
The uneven, slow roll-out of vaccinations in the United States and across the world mean that people are going to have to get sick to achieve herd immunity in their communities or they will have to lockdown and wait to get vaccinated. The result is that large parts of America and entire countries will likely have lock downs from the Delta Variant, surges of illness, or mixes of both. The more people the virus infects in different settings, the greater the chance that dangerous new variants arise which current immunities are not effective against.
Governments, central banks, and markets will find anticipating and managing these rolling crises problematic. These and other risks described in earlier Macro ESG pieces are quite likely to overwhelm monetarily stimulated stock markets.
Consequently, Macro ESG went inordinately short US equities today (June 29th) through large purchases of deep out of the money one-year puts in the Leveraged Aggressive Model Portfolio.
Ideas - Double Bubble Ending, Stock Markets Will Go Down
3. Double Bubble Ending
We are keen to be short Nasdaq futures mainly because its dominant Big Tech names have been the biggest beneficiaries of price appreciation during the Trump Administration and during the Pandemic. Hence, it’s only logical that when the Fed’s protective bubble is unwound that we should expect the Big Tech sector to also continue falling when the Trump Bubble collapses as well. We call this the Double Bubble - the first, constructive; the second, destructive.
Ideas - Short Nasdaq 100 Futures on US 10 Year Yield Decline
The decline in US 10 Year yields is a decent confirmation of our bearish US equities view so we are putting on an 84% Nasdaq 100 futures short in the Leveraged Aggressive Model Portfolio.
If we are wrong, then Leveraged Aggressive will lose 69 basis points on a 104% gross short position.
Ideas - Sell All US Equities Now, Decline Will be Worse than 2020
1. COVID Risk Increasing
News of Covid success in the United States and UK is masking much bigger problems. News reports estimate that 30,000 people are dying a day in India. Covid is still spreading out across the developing world and Asia (Tokyo and Melbourne on lockdown).
2. Variant Risk Increasing
The risk of a super variant that current vaccines are ineffective against emerging from these hotspots is a realistic possibility and will drive down risk taking in markets. As 200 countries come together for the Olympics in Japan, a super variant could emerge from the Games, as a chief doctor has warned, begging the government to postpone the games.
3. Republicans
As the Democrats have such a narrow margin of control in the Congress, the Republicans are highly incentivized to harm the economy and be generally disruptive so as to weaken support for President Biden’s policies and push voters to support the Republicans in the mid-term elections and take control of the House and the Senate.
For example, just two days ago former National Security Advisor General Flynn talked up a coup, the Governor of Texas just signed a law that will limit abortions after six weeks, and Republican states across the US are limiting voting access.
SOCIAL MEDIA SHORT UPDATE
NB: This is an update to the January 11, 2021 piece “Social Media is a Solid Short.”
When Tim Cook, CEO of Apple, called out Facebook’s business model as being a social liability for humanity, he put a cap on the stock price.
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Trade location: Facebook shorts should be made against the high of this day. While the market power is so substantial now, FB is gently listing along.
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As the US congress and President Biden are tied up with vaccinating America and getting the stimulus program into law, this has kept the hammer of the government from coming down yet on social media while Australia led the challenge of the social media revenue model. If this were to happen across the world, Facebook’s near 40% profit margin on about $80 billion in revenue would shrink.
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Jeff Bezos confirmed the negative outlook for mega-tech when he announced that he is stepping down as CEO to become Executive Chairman of Amazon, in a move almost certainly tied to the fact that the top job will become about managing regulatory risks like anti-trust, labor unions, and consumer privacy.
SOCIAL MEDIA IS A SOLID SHORT
The time has come to short social media which means Facebook and Twitter as they’ve been the engines of the political controversy.
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After last week’s attack on Capitol Hill, the Congress has impeached the President for a record second time and will certainly reign in his tool of power - social media.
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The Russell 2000 Small Cap index is up ~20% since the election of Joe Biden on November 10th, indicating a change in stock market leadership.
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As Facebook has been riding a wave of good will for a long time that has allowed the company to remain exceptionally profitable – that good will is totally over, and the pendulum will swing the other way. Facebook may be broken up on anti-trust grounds and long investigations and hearings will be burdensome to the company.
Worse than Watergate: The US is a Long-Term Buy
We are at a historic moment in the history of the United States.
As Macro ESG has been writing for some time, the Trump administration is fitting the historical analog of the two previous presidencies, Hoover and Carter, that preceded their respective transformational presidencies, FDR and Reagan.
This means that Joe Biden is going to be a transformational president, just like FDR and Reagan, which makes the US a long-term buy.
Blue Wave is Complete With Historic Diversity
Blue Wave is Complete
The election of Raphael Warnock and Jon Ossoff in the Georgia Senate run-off elections has completed the Blue Wave.
Macro ESG Called It Months Ago
Macro ESG called on July 23 in “Macro ESG Daily: We Are At an Inflection Point” that "...the Senate is going to fall to the Democrats too. It’s going to be a political Armageddon."
And this is exactly what happened today.
Historic Diversity From Georgia
Raphael Warnock is the first African American Senator to win an election in the Deep South without being an incumbent since Reconstruction (the period following the Civil War).
Similarly, Jon Ossoff is the first Jewish Senator from the Deep South to be elected to the Senate since Benjamin Jonas, a Democrat, who was elected in 1879 from Louisiana.
Democrats to Win Both Senate Seats in Georgia
Bad Virus News Wins Georgia
I expect that on January 5th the news will be so bad about the pandemic across the country that voters are going to say – No, we are not going to support a party whose President said covid was all going away, was protected in the Senate, and who did not move on covid relief until they had to for their own political interests.
How Biden’s Plan to Decarbonize America Will Impact the Dollar
Macro ESG Summary
In summary, the US dollar’s value is determined by S - Social assessment (class and race divisions) which is primarily determined by its G - Government assessment (capability and leadership).
Investment and Trading Plan
If a surprise event comes up - like a bad ending to the war in Afghanistan - that leads to protests in the US and a decline in the Social assessment, then the US dollar is a solid short. If other bad Government actions/decisions drives Social lower, then the USD is a very solid short.
Conversely, if Joe Biden maintains strong social cohesion and pulls the country together after Mr. Trump leaves office with a solid plan that the country buys into, then the dollar is all set to be steady to up. In Macro ESG speak, if strong G leads to steady to strong S - then the USD is a buy.
Sustainability Arbitrage LLC and 2021 Surprise Forecast
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I am pleased to announce that Macro ESG is now the research product of Sustainability Arbitrage LLC, a company that I founded. Macroesg.com will be the research portal for Sustainability Arbitrage.
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I believe that a significant surprise event likely to happen in 2021 will be the massacre by the Taliban of mid-level and low-level collaborators in Kabul, Afghanistan. I have not seen this idea stated anywhere and as it is so obvious – it leads me to believe that this could be a surprise with power in the markets.
“Macro ESG is calling the election definitively for Biden” 14 June 2020
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Macro ESG made a high conviction call on June 14th that Joe Biden would win the election with clear, sensible reasons (hence, the bullseye graphic above).
Macro ESG then went on to lay out an investment plan that would work in a Biden administration and beyond.
Macro ESG has taken the liberty to simply duplicate the original piece from June 14, 2020 below.
Please click this link to the Wayback Machine at Internet Archive to verify.
Blue Wave Still Possible
The Presidency
At 264 Electoral College votes, if Joe Biden wins Nevada tomorrow (which Hilary Clinton won in 2016), then Mr. Biden is the President.
The Senate
The Senate is still winnable via Georgia run-offs in January and worsening pandemic.
Red Alert 2 = Republicans to Lose Senate
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The Republican Senators commitment to no new fiscal stimulus plan will drive the equity market lower.
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A lower equity market will hurt the median voter and will drive down support for Republican candidates.
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This will push yields lower in US government bonds and create fait accompli for Biden’s win amongst institutional investors who will treat the new administration with great relief.
Trump Blow Out Loss Likely as More Blocks Oppose Him
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The recent rise in US government bond yields on the longer end (7 to 30 years) indicates investors are already buying into the Biden win and $2+ trillion of green infrastructure spend (I was completely wrong here, expecting the Long Bond to fall to a zero yield {pls see Trump Leads the US to a New Low in Global Norms} in a rush to safety during a highly contested election that looks less likely) which has also brought a firming of the USD too.
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As the House of Representatives prepares to take on the “platform” technology stocks (as covered in Macro ESG here and here, a big topic that will absorb several pieces shortly), it’s a good time to diversify away from the liquidity-fueled names. Whenever Trump says he’ll do a stimulus deal and the market goes up – sell a bit of the old portfolio and when he next says that the deal is off – use the dip to buy. Use the see-saw of Trump’s strategy to get better average prices.
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Also noticeable is the solid performance of the RMB as predicted in China Builds Investment Alliances with Oil Suppliers via Rising RMB + Equities as US Squabbles and will be a key theme of 2020 – go with it. China is strong and getting stronger – the next round of political showdowns isn’t going to start until after the Biden inauguration.
Biden Wins it with Florida, North Carolina, and Arizona
Following the Dictator’s Handbook, to show strength, President Trump made a big return to the White House last night in a last-ditch effort to garner media attention.
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Equities and oil are a short as Trump seeks to motivate his base to get out the vote through fomenting fear and bad news via declaring that the stimulus deal is off until after he wins the election. If the market falls out of bed, Trump will hit the breaks through declaring the stimulus talks are back on.
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As this is a weak, easily reversible decline, invest your time in putting together a Green Infrastructure Boom portfolio to own for the next 3-5 years.
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Closely watch developments in Florida, North Carolina, and Arizona to determine the fate of the election being decisive for Biden or not.
What Happens if Trump Gets Really Sick
If Donald Trump becomes intubated or dies from COVID-19, then it is likely that:
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Trump’s underlings and the Republican Party will quickly abandon him and his party of one ethos.
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The election: Republican Senators in weak seats will likely defect to the Democrats, and
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Seek to quickly approve a stimulus deal which would be very bullish for the the US stock market.
Trump Will Lose
The US dollar will trade inversely to President Trump’s fortunes.
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If the election isn’t resolved through an overwhelming win for Biden on election night like I expect, get short the US dollar until the Supreme Court resolves the scenario.
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If Donald Trump starts to really slump in the polls, then look to get short the US dollar as he’ll likely engage in destabilizing activities to revive his flailing bid.
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If Donald Trump is unable to carry on the election because of the coronavirus, then the US dollar is a buy.