Energy

Highlights Our top five “black swan” risks for 2022: Social unrest in China; Russian invasion of all of Ukraine; unilateral Israeli strikes on Iran; a cyber attack that goes kinetic; and a failure of OPEC 2.0. Too early to buy the dip on Russian assets: President Biden says Putin will probably “move in” and re-invade Ukraine, Russian embassy staff have been evacuating Ukraine, the US and UK have been providing more arms to Ukraine, and the US is warning of a semiconductor embargo against Russia. Talks resume in Geneva on Friday. Tactically investors should take some risk off the table, especially if linked to Russia and Europe.  Stay short the Russian ruble and EM Europe; stay short the Chinese renminbi and Taiwanese dollar; stay long cyber security stocks; and be prepared for oil volatility. Convert tactical long equity trades to relative trades: long large caps versus small caps, long defensives versus cyclicals, and long Japanese industrials versus German industrials. Feature Chart 1Recession Probability And Yield Curve Recession Probability And Yield Curve Recession Probability And Yield Curve The 2/10-year yield curve is flattening and now stands at 79 bps, while the implied probability of a recession over the next 12 months troughed at 5.9% in April 2021, and as of December 2021 stood at 7.7% (Chart 1). Apparently stagflation and recession are too high of a probability to constitute a “black swan” risk for this year. Black swans are not only high impact but also low probability. In this year’s annual “Five Black Swan” report, the last of our 2022 outlook series, we concentrate on impactful but unlikely events. These black swans emerge directly from the existing themes and trends in our research – they are not plucked at random. The key regions are highlighted in Map 1. Chart Black Swan #1: Major Social Unrest Erupts In China China’s financial problems are front and center risks for investors this year. They qualify as a “Gray Rhino” rather than “Black Swan” risk.1 It is entirely probable that China’s financial and property sector distress will negatively impact Chinese and global financial markets in 2022. What investors are not expecting is an eruption of social unrest in China that fouls up the twentieth national party congress this fall and calls into question the Communist Party’s official narrative that it is handling the pandemic and the underlying economic transition smoothly. Social unrest is a major risk around the world in the face of the new bout of inflation. Most of the democracies have already changed governments since the pandemic began, recapitalizing their political systems, but major emerging markets – Russia, India, Turkey, Brazil – have not done so. They have seen steep losses of popular support for both political leaders and ruling parties. There is little opinion polling from China and people who are surveyed cannot speak openly. It is possible that the government’s support has risen given its minimization of deaths from the pandemic. But it is also possible that it has not. Beijing’s policies over the past few years have had a negative impact on the country’s business elite and foreign relations. There are disgruntled factions within China, though the current administration has a tight grip over the main organs of power. Since President Xi is trying to clinch his personal rule this fall, sending China down a path of autocracy that proved disastrous under Chairman Mao Zedong, it is possible he will face surprise resistance. China’s economic growth is decelerating, clocking in at a 4.0% quarter-on-quarter growth rate at the end of last year. While authorities are easing policy to secure the recovery, there is a danger of insufficient support. Private sentiment will remain gloomy, as reflected by weak money velocity and a low propensity to spend among both businesses and households (Chart 2). The government will continue to be repressive in the lead up to the political reshuffle. At least for the first half of the year the economy will remain troubled. Structurally China is ripe for social unrest. It suffers from high income inequality and low social mobility, comparable to the US and Brazil, which are both struggling with political upheaval (Chart 3). Chart 2China's Private Sector Still Depressed China's Private Sector Still Depressed China's Private Sector Still Depressed ​​​​​ Chart 3 ​​​​​​ In addition China is keeping a stranglehold over Covid-19. This “Zero Covid” policy minimizes deaths but suppresses economic activity. Strict policy has also left the population with a very low level of natural immunity and the new Omicron variant is even more contagious than other variants. Hence the regime is highly likely to double down to prevent an explosive outbreak. The service side of the economy will continue to suffer if strict lockdowns are maintained, exacerbating household and business financial difficulties (Chart 4). Yet in other countries around the world, government decisions to return to lockdowns have sparked unrest. Chart 4Zero Covid Policy: Not Sustainable Beyond 2022 Zero Covid Policy: Not Sustainable Beyond 2022 Zero Covid Policy: Not Sustainable Beyond 2022 China’s “Misery Index” (unemployment plus inflation) is rising sharply. While misery is ostensibly lower than that of other emerging markets, China’s unemployment data is widely known to be unreliable. If we take a worst-case scenario, looking at youth unemployment and fuel prices, misery is a lot higher (Chart 5). The youth, who are having the hardest time finding jobs, are also the most likely to protest if conditions become intolerable (Chart 6). Of course, if social unrest is limited to students, it will lack support among the wider populace. But it is inflation, not youth activism, that is the reason for China’s authorities to be concerned, as inflation is a generalized problem that affects workers as well as students. Chart 5China's Misery Index Is Higher Than It Looks China's Misery Index Is Higher Than It Looks China's Misery Index Is Higher Than It Looks ​​​​​ Chart 6China's Troubled Youth China's Troubled Youth China's Troubled Youth Why would protesters stick their necks out knowing that the Communist Party will react ferociously to any sign of instability during President Xi Jinping’s political reshuffle? True, mainland Chinese do not have the propensity to political activism that flared up in protests in Hong Kong in recent years. Also the police state will move rapidly to repress any unrest. Yet the entire focus of Xi Jinping’s administration, since 2012, has been the restoration of political legitimacy and prevention of popular discontent. Xi has cracked down on corruption, pollution, housing prices, education prices, and has announced his “Common Prosperity” agenda to placate the low and middle classes.2 The regime has also cracked down on the media, social media, civil society, and ideological dissent to prevent political opposition from taking root. If the government were not concerned about social instability, it would not have been adopting these policies. Disease, often accompanied by famines or riots, has played a role in the downfall of six out of ten dynasties, so Beijing will not be taking risks for granted (Table 1). Table 1Disease And Downfall Of Chinese Dynasties Five Black Swans For 2022 Five Black Swans For 2022 Social instability would have a major impact as it would affect China’s stability and global investor sentiment toward China. Western democracies would penalize China for violations of human rights, leaving China even more isolated. Bottom Line: Investors should stay short the renminbi and neutral Chinese equities. Foreign investors should steer clear of Chinese bonds in the event of US sanctions. After the party congress this fall there will be an opportunity to reassess whether Xi Jinping will “let a hundred flowers bloom,” thus improving the internal and external political and investment environment, but this is not at all clear today. Black Swan #2: Russia Invades All (Not Just Part) Of Ukraine US-Russia relations are on the verge of total collapse and Russian equities have sold off, in line with our bearish recommendations in reports over the past two years. Russia’s threat of re-invading Ukraine is credible. Western nations are still wishy-washy about the counter-threat of economic sanctions, judging by German Chancellor Olaf Scholz’s latest comments, and none are claiming they will go to war to defend Ukraine.3 Russia is looking to remove the threat of Ukraine integrating militarily and economically with the West. The US and UK are providing Ukraine with defense weaponry even as Russia specifically demands that they cease to do so. President Putin may choose short-term economic pain for long-term security gain. The consensus view is that if Russia does invade, it will undertake a limited invasion. But what if Russia invades all of Ukraine? To be clear, a full invasion is unlikely because it would be far more difficult and costly for Russia. It would go against Putin’s strategy of calculated risk and limited conflict. Table 2 compares Russia and Ukraine in size and strength, alongside a comparison of the US and Iraq in 2002. This is not a bad comparison given that Ukraine’s and Iraq’s land area and active military personnel are comparable. Table 2Russia-Ukraine Balance Of Power 2022 Compared To US-Iraq 2002 Five Black Swans For 2022 Five Black Swans For 2022 Russia would be biting off a much bigger challenge than the US did. Ukraine’s prime age population is 2.5 times larger than Iraq’s in 2002, and its military expenditure is three times bigger. The US GDP and military spending were 150 and 250 times bigger than Iraq’s, while Russia’s GDP and military spending are about ten times bigger than Ukraine’s today. Iraq was not vital to American national security, whereas Ukraine is vital to Russia; Russia has more at stake and is willing to take greater risks. But Ukraine is in better shape to resist Russian occupation than Iraq was to resist American. The point is that the US invasion went smoothly at first, then got bogged down in insurgency, and ultimately backfired both in political and geopolitical terms. Russia would be undertaking a massive expense of blood and treasure that seems out of proportion with its goal, which is to neutralize Ukraine’s potential to become a western defense ally and host of “military infrastructure.” However, there are drawbacks to partial invasion. The remainder of the Ukrainian state would be unified and mobilized, capable of integrating with the western world, and willing to support a permanent insurgency against Russian troops in eastern Ukraine. Russia has forces in Belarus, Crimea, and the Black Sea, as well as on Ukraine’s eastern border, giving rise to fears that Russia could attempt a three-pronged invasion of the whole country. In short, it is conceivable that Russian leaders could make the Soviet mistake of overreaching in the military aims, or that a war in eastern Ukraine could inadvertently expand into the west. If Russia tries to conquer all of Ukraine, the global impact will be massive. A war of this size on the European continent for the first time since World War II would shake governments and populations to their bones. The borders with Poland, Romania, the Baltic states, Slovakia, Hungary, Finland and the Black Sea area would become militarized (Map 2). Chart NATO actions to secure its members and fortify their borders would exacerbate tensions with Russia and fan fears of a wider war. Trade flows would become subject to commerce destruction, affecting even neutral nations, including in the Black Sea. Energy supplies would tighten further, sending Russia and probably Europe into recession. The disruption to business and travel across eastern Europe would be deep and lasting, not only due to sanctions but also due to a deep risk-aversion that would affect foreign investors in the former Soviet Union and former Warsaw Pact. Germany would be forced to quit sitting on the fence, as it would be pressured by the US and the rest of Europe to stand shoulder to shoulder in the face of such aggression. Finland and Sweden would be much more likely to join NATO, exacerbating Russia’s security fears. Russia would suffer a drastic loss of trade, resulting in recession, and its currency collapse would feed inflation (Chart 7). Chart 7Inflation Poses Long-Term Threat To Putin Regime Inflation Poses Long-Term Threat To Putin Regime Inflation Poses Long-Term Threat To Putin Regime Ultimately the consequences would be negative for the Putin regime and Russia as a result of recession and international isolation. But in the short run the Russian people would rally around the flag and support a war designed to prevent NATO from stationing missiles on their doorstep. And their isolation would not be total, as they would strengthen ties with China and conduct trade via proxy states in the former Soviet Union. Bottom Line: A full-scale invasion of all of Ukraine is highly unlikely because it would be so costly for Russia in military, economic, and political terms. But the probability is not zero, especially because a partial re-invasion could lead to a larger war. While global investors would react in a moderate risk-off matter to a limited war in eastern Ukraine, a full-scale war would trigger a massive global flight to safety as it would call into question the entire post-WWII peace regime in Europe. Black Swan #3: Israel Attacks Iran The “bull market in Iran tensions” continues as there is not yet a replacement for the 2015 nuclear deal that the US abrogated. Our 2022 forecast that the UAE would get caught in the crossfire was confirmed on January 17 when Iran-backed Houthi rebels expanded their range of operations and struck Abu Dhabi (Map 3). The secret war is escalating and US-led diplomacy is faltering. Chart Iran is not going to give up its nuclear program. North Korea achieved nuclear arms and greater military security and is now developing first and second strike capabilities. Meanwhile Ukraine, which faces another Russian invasion, exemplifies what happens to regimes that give up nuclear arms (as do Libya and Iraq). Iran appears to be choosing the North Korean route. While we cannot rule out a minor agreement between President Biden and Iranian President Ebrahim Raisi, we can rule out a substantial deal that halts Iran’s nuclear and missile progress. Here’s why: Any day now Iran could reach nuclear “breakout capacity,” with enough highly enriched uranium to construct a nuclear device (Table 3).4 Table 3Iran’s Violations Of 2015 Nuclear Deal Since US Exit Five Black Swans For 2022 Five Black Swans For 2022 Within Iran’s government, the foreign policy doves have been humiliated and kicked out of office while the hawks are fully in control. No meaningful agreement can be reached before 2024 because of the risk that the US will change ruling parties again and renege on any promises. Iran is highly incentivized to make rapid progress on its nuclear program now. The US will not be able to lead the P5+1 coalition to force Iran to halt its program because of its ongoing struggles with Russia and China. China is striking long-term cooperation deals with Iran. Israel has a well-established record of taking unilateral action, specifically against regional nuclear programs, known as the “Begin Doctrine.”5 Israel’s threats are credible on this front, although Iran is a much greater operational challenge than Iraq or Syria. Iran’s timeline from nuclear breakout to deliverable nuclear weapon is 12-24 months.6 Iran’s missile program is advanced. Missile programs cannot be monitored as easily as nuclear activity, so foreign powers base the threshold on nuclear capability rather than missile capability. Iran had a strong incentive to move slowly on its nuclear and missile programs in earlier years, to prevent US and Israeli military interference. But as it approaches breakout capacity it has an incentive to accelerate its tempo to a mad dash to achieve nuclear weaponization before the US or Israel can stop it. Now that time may have come. The Biden administration is afraid of higher oil prices and Israeli domestic politics are more divided and risk-averse than before. And yet Iran’s window might close in 2025, as the US could turn aggressive again depending on the outcome of the 2024 election. Hence Iran has an incentive to make its dash now. The US and Israel will restate their red lines against Iranian nuclear weaponization and brandish their military options this year. But the Biden administration will be risk-averse since it does not want to instigate an oil shock in an election year. Israel is more likely than the US to react quickly and forcefully since it is in greatest danger if Iran surprises the world with rapid weaponization. Here are the known constraints on unilateral Israeli military action: Limited Israeli military capability: Israel would have to commit a large number of aircraft, leaving its home front exposed, and even with US “bunker buster” bombs it may not penetrate the underground Fordow nuclear facility.7 Limited Israeli domestic support: The Israeli public is divided on whether to attack Iran. The post-Netanyahu government recently came around to endorsing the US’s attempt to renegotiate the nuclear deal. Limited US support: Washington opposes Israeli unilateralism that could entangle the US into a war. Israel cannot afford to alienate the US, which is its primary security guarantor. Iranian instability: The Iranian regime is under economic distress due to “maximum pressure” sanctions. It is vulnerable to social unrest, not least because of its large youth population. These constraints have been vitiated in various ways, which is why we raise this Israeli unilateralism as a black swan risk: Where there’s a will, there’s a way: If Israel believes its existence will be threatened, it will be willing to take much greater operational risks. It has already shown some ability to set back Iran's centrifuge program beyond the expected.8 Israeli opinion will harden if Iran breaks out: If Iran reaches nuclear breakout or tests a nuclear device, Israeli opinion will harden in favor of military strikes. Prime Minister Naftali Bennett has an incentive to take hawkish actions before he hands the reins of government over to a partner in his ruling coalition as part of a power-sharing agreement. The ruling coalition is so weak that a collapse cannot be ruled out. US opposition could weaken: Biden will have to explore military options if talks fail and Iran reaches nuclear breakout capacity. Once the midterms are over, Israel may have even more freedom to act, while a gridlocked Biden may be looking to shift his focus to foreign policy. Iranian stability: Iran’s social instability has not resulted in massive unrest or regime fracture despite years of western sanctions and a global recession/pandemic. Yet now energy prices are rising and Iran has less reason to believe sanction regimes will be watertight. From Israeli’s point of view, even regime change in Iran would not remove the nuclear threat once nuclear weapons are obtained. Finally, while Israel cannot guarantee that military strikes would successfully cripple Iran’s nuclear program and prevent weaponization, Israel cannot afford not to try. It would be a worse outcome to stand idly by while Iran gets a nuclear weapon than to attack and fail to set that program back. Hence the likeliest outcome over the long run is that Iran pursues a nuclear weapon and Israel attacks to try to stop it, even if that attack is likely to fail (Diagram 1). Diagram 1Game Theory: Will Israel Attack Iran? Five Black Swans For 2022 Five Black Swans For 2022 Bottom Line: A unilateral Israeli strike is unlikely but would have a massive impact, as 21% of global oil and 26% of natural gas flows through the Strait of Hormuz, and conflict could disrupt regional energy production and/or block passage through the strait itself. Black Swan #4: Cyber Attacks Spill Into Real World Investors are very aware of cyber security risks – it holds a respectable though not commanding position in the ranks of likely crisis events (Table 4). Our concern is that a cyber attack could spill over into the real world, impairing critical infrastructure, supply chains, and/or prompting military retaliation. Table 4Cyber Events Underrated In Consensus View Of Global Risks Five Black Swans For 2022 Five Black Swans For 2022 Russian attacks on US critical infrastructure by means of ransomware gangs disrupted a US fuel pipeline, meat-packing plant, and other critical infrastructure in 2021. Since then the two countries have engaged in negotiations over cyber security. The Russian Federal Security Bureau has cracked down on one of the most prominent gangs, REvil, in a sign that the US and Russia are still negotiating despite the showdown over Ukraine.9 Yet a re-invasion of Ukraine would shatter any hope of cooperation in the cyber realm or elsewhere. Russia is already using cyberattacks against Ukraine and these activities could expand to Ukraine’s partners if the military conflict expands. Should the US and EU impose sweeping sanctions that damage Russia’s economy, Russia could retaliate, not only by tightening energy supply but also by cyber attacks. Any NATO partners or allies would be vulnerable, though some states will be more reactive than others. Interference in the French election, for example, would be incendiary. The key question is: if Russia strikes NATO states with damaging cyber attacks, at what point would it trigger Article V, the mutual defense clause? There are no established codes of conduct or red lines in cyber space, so the world will have to learn each nation’s limits via confrontation and retaliation. Similar cyber risks could emerge from other conflicts. China is probably not ready to invade Taiwan but it has an interest in imposing economic costs on the island ahead of this fall’s midterm elections. Taiwan’s critical role in the semiconductor supply chain means that disruptions to production would have a global impact. Israel and the US have already used cyber capabilities to attack Iran and set back its nuclear program. These capabilities will be necessary as Iran approaches breakout capacity. Yet Iran could retaliate in a way that disrupts oil supplies. North Korea began a new cycle of provocations last September, accelerated missile tests over the past four months, and is dissatisfied with the unfinished diplomatic business of the Trump administration. In the wake of the last global crisis, 2010, it staged multiple military attacks against South Korea. South Korea may be vulnerable due to its presidential elections in May. The semiconductor or electronics supply chain could be interrupted here as well as in Taiwan. Bottom Line: There is no code of conduct in cyber space. As geopolitical tensions rise, and nations test the limits of their cyber capabilities, there is potential for critical infrastructure to be impaired. This could exacerbate supply chain kinks or provoke kinetic responses from victim nations. Black Swan #5: OPEC 2.0 Falls Apart The basis of the OPEC 2.0 cartel is Russian cooperation with Saudi Arabia to control oil supply and manage the forward price curve. Backwardation, when short-term prices are higher than long-term, is ideal for these countries since they fear that long-term prices will fall. In a world where Moscow and Riyadh both face competition from US shale producers as well as the green energy revolution, cooperation makes sense. Yet the two sides do not trust each other. Cooperation broke down both in 2014 and 2020, sending oil prices plunging. Falling global demand ignited a scramble for market share. Interestingly, Russian military invasions have signaled peak oil price in 1979, 2008, and 2014. Russia, like other petro-states, has greater room for maneuver when oil revenues are pouring in. But high prices also incentivize production, disincentivize cartel discipline, and trigger reductions in global demand (Chart 8). Chart 8Russian Invasions And Oil Price Crashes Russian Invasions And Oil Price Crashes Russian Invasions And Oil Price Crashes Broadly speaking, Saudi oil production rose modestly during times of Russian military adventures, while overall OPEC production was flat or down, and Russian/Soviet production went up (Chart 9). Chart 9Saudi And OPEC Oil Production During Russian Military Adventures Saudi And OPEC Oil Production During Russian Military Adventures Saudi And OPEC Oil Production During Russian Military Adventures Since 2020, we have held that OPEC 2.0 would continue operating but that the biggest risk would come in the form of a renewed US-Iran nuclear deal that freed up Iranian oil exports. In 2014, the Saudis increased production in the face of the US shale threat as well as the Iranian threat. This scenario is still possible in 2022 but it has become a low-probability outcome. Even aside from the Iran dynamic, there is some probability that Russo-Saudi cooperation breaks down as global growth decelerates and new oil supply comes online. Bottom Line: The world’s inflation expectations are elevated and closely linked to oil prices. Yet oil prices hinge on an uneasy political agreement between Russia and Saudi Arabia that has fallen apart twice before. If Russia invades Ukraine, or if US withdraws sanctions on Iran, for example, then Saudi Arabia could make a bid to expand its market share and trigger price declines in the process. Two Bonus Black Swans: Turkey And Venezuela Turkey lashes out: Our Turkish Political Capital Index shows deterioration for President Recep Erdogan’s political capital across a range of variables (Table 5). With geopolitical pressures increasing, and domestic politics heating up ahead of the 2023 elections, Erdogan’s behavior will become even more erratic. His foreign policy could become aggressive, keeping the lira under pressure and/or weighing on European assets. Table 5Turkey: Erdogan’s Political Capital Wearing Thin Five Black Swans For 2022 Five Black Swans For 2022 Venezuela’s Maduro falls from power: Venezuelan regime changes often follow from military coups. These coups do not only happen when oil prices collapse – sometimes the army officers wait to be sure prices have recovered. Coup-throwers want strong oil revenues to support their new rule. An unexpected change of regimes would affect the oil market due to this country’s giant reserves. Bottom Line: Turkey’s political instability could result in foreign aggression, while Venezuela’s regime could collapse despite the oil price recovery. Investment Takeaways We are booking profits on our tactical long trades on large caps and defensive sectors. We will convert these to relative trades: long large caps over small caps, and long defensives over cyclicals. We also recommend converting our tactical long Japan trade into long Japanese industrials / short German industrials equities. If US-Russia diplomacy averts a war we will reconsider.     Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com   Footnotes 1      “Gray Rhino” is a term coined by author Michele Wucker to describe large and probable risks that people neglect or avoid. For more, see thegrayrhino.com. 2     Xi Jinping recently characterized the “common prosperity” agenda as follows: “China has made it clear that we strive for more visible and substantive progress in the well-rounded development of individuals and the common prosperity of the entire population. We are working hard on all fronts to deliver this goal. The common prosperity we desire is not egalitarianism. To use an analogy, we will first make the pie bigger, and then divide it properly through reasonable institutional arrangements. As a rising tide lifts all boats, everyone will get a fair share from development, and development gains will benefit all our people in a more substantial and equitable way.” See World Economic Forum, “President Xi Jinping’s message to The Davos Agenda in full,” January 17, 2022, weforum.org. 3     Chancellor Scholz, when asked whether Germany would avoid using the Nord Stream II pipeline if Russia re-invaded Ukraine, said, "it is clear that there will be a high cost and that all this will have to be discussed if there is a military intervention against Ukraine.” He was speaking with NATO Secretary-General Jens Stoltenberg. See Hans Von Der Burchard, “Scholz: Germany will discuss Nord Stream 2 penalties if Russia attacks Ukraine,” Politico, January 18, 2022, politico.eu. 4     For the Begin Doctrine, see Meir Y. Soloveichik, “The Miracle of Osirak,” Commentary, April 2021, commentary.org. 5     The estimate of 12-24 months to mount a nuclear warhead on a missile has been cited by various credible sources, including David Albright and Sarah Burkhard, “Highlights of Iran’s Perilous Pursuit of Nuclear Weapons,” Institute for Science and International Security, August 24, 2021, isis-online.org, and Eric Brewer and Nicholas L. Miller, “A Redline for Iran?” Foreign Affairs, December 23, 2021, foreignaffairs.com. 6     See Edieal J. Pinker, Joseph Szmerekovsky, and Vera Tilson, “Technical Note – Managing a Secret Project,” Operations Research, February 5, 2013, pubsonline.informs.org, as well as “What Can Game Theory Tell Us About Iran’s Nuclear Intentions?” Yale Insights, March 17, 2015, insights.som.yale.edu.  7     See Josef Joffe, “Increasingly Isolated, Israel Must Rely On Nuclear Deterrence,” Strategika 35 (September 2016), Hoover Institution, hoover.org. 8     The sabotage of the Iran Centrifuge Assembly Center at the Natanz nuclear facility in July 2020 “set back Iran’s centrifuge program significantly and continues to do so,” according to David Albright, Sarah Burkhard, and John Hannah, “Iran’s Natanz Tunnel Complex: Deeper, Larger Than Expected,” Institute for Science and International Security, January 13, 2022, isis-online.org. For a recent positive case regarding Israel’s capabilities, see Mitchell Bard, “Military Options Against Iran,” Jewish Virtual Library, American-Israeli Cooperative Enterprise, January 2022, jewishvirtuallibrary.org.  9     For the FSB and REvil, see Chris Galford, “Russian FSB arrests members of REvil ransomware gang following attacks on U.S. infrastructure,” Homeland Preparedness News, January 18, 2022, homelandprepnews.com. For the Colonial Pipeline and JBS attacks, and other ransomware attacks, see Jonathan W. Welburn and Quentin E. Hodgson, “How the United States Can Deter Ransomware Attacks,” RAND Blog, August 9, 2021, rand.org. Strategic Themes Open Tactical Positions (0-6 Months) Open Cyclical Recommendations (6-18 Months)

Highlights The Kingdom of Saudi Arabia (KSA), Iraq, the UAE and Kuwait – the OPEC 2.0 states capable of increasing production this year – will have to step up for coalition members unable to lift output, including Russia. US shale-oil output also will have to increase to cover demand. The COVID-19 omicron variant has proven to be less severe than anticipated, which likely will translate into a faster recovery in oil demand than was expected in December. One risk looms large: China's zero-COVID policy greatly reduced virus transmission in the country; however, this also reduced natural antibody protection in its population. This is exacerbated by a lack of mRNA vaccine availability. Faltering supply and strong demand will keep inventories tight, reducing buffers to supply shocks – e.g., the Kirkuk–Ceyhan Oil Pipeline explosion this week. We are returning our Brent forecast for 2022 to $80/bbl; for 2023, we continue to expect $81/bbl (Chart of the week). Our forecast assumes OPEC 2.0 will increase supply so as to keep Brent prices below $90/bbl. US shale-oil output also is expected to rise. We continue to see oil-price risk skewed to the upside. Still, demand-destruction from high prices or widespread omicron-induced lockdowns remain clear risks to our outlook. Feature Given the relatively mild symptoms associated with the COVID-19 omicron variant, global oil demand likely will continue to recover lost ground and return to trend sooner than expected. Faltering supply from OPEC 2.0 member states means prices will remain elevated, and perhaps push higher. On the back of these fundamentals, we are restoring our Brent price forecast to $80/bbl for this year, and $81/bbl for 2023. This is the consensus view, and we find ourselves in the uncomfortable position of sharing it. Chart 1 Presently, the oil market is bulled up, expecting high prices this year and next, with Brent forecasts clustering in the $80-$85/bbl range out to 2025.1 Some headline-grabbing forecasts call for $100-plus prices, as top OPEC 2.0 producers – e.g. Russia, Angola and Nigeria– continue to strain in their efforts to restore production, and demand remains buoyant (Chart 2). Chart 2 A consensus usually emerges after most market participants have adjusted their positioning to reflect a commonly held view. This usually is a temporary equilibrium. The market typically finds the highest-pain price trajectory required to shatter the consensus view – e.g., selling off because widely held demand expectations are too high or supply expectations are too low, and vice versa. Ultimately, a fundamental shock destabilizes the consensus, and prices move higher or lower to reflect the new reality. The biggest risks to our price forecast are demand destruction from high prices or widespread omicron-induced lockdowns.2 To keep prices from finding a new equilibrium above $90/bbl, a policy response from OPEC 2.0 to increase production will be required. In addition, US shale-oil output will have to increase. This is not to say we are dismissing above-consensus price realizations: Inventories will continue to draw hard as long as the level of supply remains below demand. This will leave little in the way of buffer stocks to even out price spikes, as the Ceyhan pipeline explosion demonstrated earlier this week.3 Geopolitical tensions are high in eastern Europe as Russia and the West square off, and in the Persian Gulf as Iran squares off against GCC states and the US.4 These structural and geopolitical risks leave markets exposed to volatile price spikes. OPEC 2.0 Falters Chart 3 Chart 4 Our forecast is contingent on the core OPEC 2.0 member states ex-Russia – KSA, Iraq, the UAE and Kuwait – increasing production by an average of ~ 3.34mmb/d in 2022 and 2.76 mmb/d in 2023 relative to 2021. Most of the increases comes from KSA, Iraq and UAE (Chart 3). In addition, we expect US shale-oil producers to increase their average output by 0.6mm b/d this year, and 1.07mm b/d in 2023 relative to 2021 (Chart 4). In 2022, US crude oil supply reaches 11.7mm b/d, and in 2023 it goes to 12.13mm b/d in our estimates. The slower increase in US output this year largely is a function of the delay we expect in assembling rigs and crews to significantly lift production from current levels. These production increases are needed to make up for ongoing downgrades of OPEC 2.0 member states' ability to increase output, including Russia, where we expect crude oil production to remain flat at a little over 10mm b/d this year on average (Table 1). Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) To Dec23 Higher Output Needed To Constrain Oil Prices Higher Output Needed To Constrain Oil Prices Back in July 2021, the coalition agreed to restore 400k b/d of production taken off the market in the wake of COVID-19 demand destruction. Thus far, the coalition has only managed to restore ~ 1.86mm b/d of the 2mm b/d pledged for August to December 2021, according to the Oxford Institute for Energy Studies (OIES). For this year, the OIES notes OPEC 2.0 "will struggle to return more than 2 mb/d of withheld supplies in 2022, compared to the headline target of 3.76 mb/d."5 Our view rests on a policy call at the end of the day: We believe OPEC 2.0 – KSA in particular – is well aware of the demand-destruction potential high nominal prices and a strong USD pose, particularly as the US Fed is embarking on a rate-hike program to accompany the quantitative-tightening measures recently adopted. Absent a concerted effort to raise production by the core OPEC 2.0 states ex-Russia and the US shale producers, prices could move above $86/bbl as supply tightens and demand continues to rise. This can be seen in The Chart of the Week (the dashed brown curve depicting our estimate for prices without higher production). Importantly, even if such a concerted effort emerges, a failure to resolve the Iran nuclear talks with the US and its allies this year would keep more than 1mm b/d of production from returning to the market. This would push average Brent prices this year and next to or above $90/bbl. Oil Demand Recovery To Continue Provided we do not see widespread lockdowns resulting from the rapid transmission of the omicron variant, we expect global demand to grow close to 4.8mm b/d this year and 1.6mm b/d in 2023 (Chart 5). This reflects our view that – baring too-high prices or another full-scale COVID-induced lockdown in a key market like China – demand resumes its return to trend. It is important to point out that the increase in oil demand we expect is being driven by economic growth, which means consumers likely can withstand high prices, just as long as they do not become excessive – i.e., entrenched above $90/bbl in our view. Chart 5Global Oil Demand Forecast Remains Steady Global Oil Demand Forecast Remains Steady Global Oil Demand Forecast Remains Steady Chart 6OPEC 2.0 Production Policy Kept Supply Below Demand OPEC 2.0 Production Policy Kept Supply Below Demand OPEC 2.0 Production Policy Kept Supply Below Demand In our base case model, we continue to see markets remaining balanced (Chart 6) – assuming we get the policy calls right – and OECD oil inventories falling (Chart 7). Even with an uptick in inventories, which presently are 31.5mm barrels above the 2010-14 average, days-forward-cover for the OECD will remain low (Chart 8). Chart 7Crude Inventories Continue To Draw Crude Inventories Continue To Draw Crude Inventories Continue To Draw Chart 8 Investment Implications The consensus view calls for oil prices to remain at current elevated levels, and to perhaps push higher. We share that view – and have maintained it for some time – which gives us pause. A consensus not only reflects a shared view. It likely reflects broad similarities in the way market participants are positioned in their capex, investment and trading outlooks. This is inherently unstable. We expect oil prices to remain elevated, and have returned our 2022 Brent forecast to $80/bbl on average. Our 2023 forecast for Brent remains $81/bbl. We continue to recommend positions that benefit from tightening markets in which forward curves are backwardated and likely to remain so. Even if we see production increasing – from the OPEC 2.0 core producers ex-Russia and the US shales – we still expect forward Brent and WTI curves to remain backwardated (prompt-delivery prices exceed deferred-delivery prices). We remain long the S&P GSCI and the COMT ETF to express this view. If we fail to see production increase to keep prices from breaching and sustaining levels above $90/bbl, long index exposure will post higher gains. The risk to our view is two-fold: 1) High prices leading to demand-destruction, which is made more acute when the USD is strong; and 2) widespread omicron-induced lockdowns, which could once again reduce consumption and lead to global supply-chain gridlock. High prices leading to demand destruction, or another round of lockdowns would force us to reconsider our positioning.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Paula Struk Research Associate Commodity & Energy Strategy paula.struk@bcaresearch.com Commodities Round-Up Energy: Bullish It's very early days, but EU experts are reviewing a draft plan leaked to the media earlier this month, which could result in gas- and nuclear-powered generation being included among sustainable energy sources, and suitable to bridge the global energy transition to renewable power. The draft of the common classification system for EU funding of sustainable economic activities, or taxonomy, apparently states gas plants can earn a “transitional” label if they meet several criteria, including an emissions limit of 270g of CO2e/kWh, or if their annual emissions average 550kg CO2e/kW or less over 20 years. This criterion would be applied to judging environmental performance of a gas plant over 20 years, but offers no guarantee that its emissions would drop over time. The chair of the expert panel said draft rules for nukes raised questions over "whether a plant can guarantee its green credentials today, if its obligation to manage nuclear waste – one of the main environmental concerns about the fuel – does not kick in until as late as 2050," according to euractiv.com, which broke the story earlier this month. Base Metals: Bullish Indonesia has become more restrictive with exports of raw commodities in order to attract more downstream investments and to play a bigger role in producing finished goods. Of these commodities, Indonesia’s supply of nickel, relative to the world is the highest, constituting ~ 38% of total global nickel supply. In 2020, the nation banned nickel ore exports, and is now considering a progressive export tax on low nickel content products such as ferronickel and nickel pig iron. This tax could reduce foreign investment in Indonesia’s nickel mines and global supply, which would, all else equal, support prices. These developments arrive on the back of low nickel inventories, which helped prices of the key battery metal reach a 10-year high last week (Chart 9).   Precious Metals: Bullish In 2021, gold ETFs were hit by outflows of ~ $9 billion, the main reason the yellow metal was unable to reach its 2020 high above the $2,000/oz mark (Chart 10). For this year, we expect a supportive gold market, as real interest rates will remain weak despite the Fed’s hawkish tilt to lift nominal interest rates higher. In line with BCA’s Foreign Exchange Strategy service, we expect the USD to fall over the 12-18 month horizon, which will also bolster gold. Chart 9 Tighter Nickel Balances Going Forward Will Push Prices Higher Tighter Nickel Balances Going Forward Will Push Prices Higher Chart 10       Footnotes 1     Please see Column: Oil prices expected to rise with big variation in projections: Kemp, published by reuters.com on January 19, 2022. 2     High nominal oil prices and a strong USD compound the former demand-destruction risk.  The latter risk of wide-spread omicron-induced lockdowns is elevated in China at present.  Its success in shutting down the transmission of earlier COVID-19 mutations has reduced the amount of antibodies to the virus in the population.  This is compounded by a lack of mRNA vaccine production and distribution, which leaves the country at risk to wide-spread omicron transmission.  In states with large shares of the population carrying COVID-19 antibodies – e.g., the UK – omicron is less of a risk and is on course to becoming endemic.  Please see 2022 Key Views: Past As Prelude For Commodities and Endemic COVID-19 Will Spur Commodities' Next Leg Higher which we published on December 16, 2021 and January 13, 2022 for discussions. 3    Oil flows are expected to return to normal in short order.  Please see Halted Iraq-Turkey flows to resume within hour: Botas, published by argusmedia.com on January 19, 2022. 4    Please see Russia/Ukraine: Implications From Kazakhstan and Geopolitical Charts For The New Year published by BCA Research's Geopolitical Strategy service on January 7 and 14, 2022, respectively, for discussions. 5    Please see Key Themes for the Global Energy Economy in 2022 published by the Oxford Institute for Energy Studies on January 18, 2022.   Investment Views and Themes Strategic Recommendations Trades Closed in 2021 Image

Highlights The neutral rate of interest in the US is 3%-to-4% in nominal terms or 1%-to-2% in real terms, which is substantially higher than the Fed believes and the market is discounting. The end of the household deleveraging cycle, rising wealth, stronger capital spending and homebuilding, and a structurally looser fiscal stance have all increased aggregate demand. In addition, deglobalization and population aging are depleting global savings, raising the neutral rate in the process. A higher neutral rate implies that monetary policy is currently more stimulative than widely perceived. This is good news for stocks, as it reduces the near-term odds of a recession. The longer-term risk is that monetary policy will stay too loose for too long, causing the US economy to overheat. This could prompt the Fed to raise rates well above neutral, an outcome that would certainly spell the end of the secular equity bull market. Investors should overweight stocks in 2022 but look to turn more defensive in late 2023. We are taking partial profits on our long December-2022 Brent futures trade, which is up 17.3% since inception. We are also closing our short meme stocks trade. AMC and GME are down 53% and 47%, respectively, since we initiated it.  The Neutral Rate Matters At first glance, the neutral rate of interest – the interest rate consistent with full employment and stable inflation – seems like a concept only an egghead economist would care about. After all, unlike actual interest rates, the neutral rate cannot be observed in real time. The best one can do is deduce it after the fact, something that does not seem very relevant for investment decisions. While this perspective is understandable, it is misguided. The yield on a long-term bond is largely a function of what investors expect short-term rates to be over the life of the bond. Today, investors expect the Fed to raise rates to only 1.75% during this tightening cycle, a far cry from previous peaks in interest rates (Chart 1). Chart 2Investor Worries That The Fed Will Tighten Too Much Has Led To A Flattening Of The Yield Curve Investor Worries That The Fed Will Tighten Too Much Has Led To A Flattening Of The Yield Curve Investor Worries That The Fed Will Tighten Too Much Has Led To A Flattening Of The Yield Curve Chart 1Expected Rate Hikes Are A Far Cry From Previous Peaks In Interest Rates Expected Rate Hikes Are A Far Cry From Previous Peaks In Interest Rates Expected Rate Hikes Are A Far Cry From Previous Peaks In Interest Rates     Far from worrying that the Fed will keep rates too low for too long in the face of high inflation, investors are worried that the Fed will tighten too much. This is the main reason why the yield curve has flattened over the past three months and the 20-year/30-year portion of the yield curve has inverted (Chart 2). Secular Stagnation Remains The Consensus View Why are so many investors convinced that the Fed will be unable to raise rates all that much over the next few years? The answer is that most investors have bought into the secular stagnation thesis, which posits that the neutral rate of interest has fallen dramatically over time. The secular stagnation thesis comes in two versions: The first or “strong form” describes an economy that needs a deeply negative – and hence unattainable – nominal interest rate to reach full employment. Japan comes to mind as an example. The country has had near-zero interest rates since the mid-1990s; and yet it continues to suffer from deflation. The second or "weak form" describes the case where a country needs a low, but still positive, interest rate to reach full employment. Such an interest rate is attainable by the central bank, and hence creates a goldilocks outlook for investors where profits return to normal, but asset prices continue to get propped up by an ultra-low discount rate. The “weak form” version of the secular stagnation thesis arguably describes the United States. Post-GFC Deleveraging Pushed Down The Neutral Rate Chart 3 One can think of the neutral rate as the interest rate that equates aggregate demand with aggregate supply at full employment. If something causes the aggregate demand curve to shift inwards, a lower real interest rate would be required to bring demand back up (Chart 3). Like many other countries, the US experienced a prolonged deleveraging cycle following the Global Financial Crisis. The ratio of household debt-to-GDP has declined by 23 percentage points since 2008. The need for households to repair their balance sheets weighed on spending, thus necessitating a lower interest rate. Admittedly, corporate debt has risen over the past decade, with the result that overall private debt has remained broadly stable as a share of GDP (Chart 4). However, the drag on aggregate demand from declining household debt was not offset by the boost to demand from rising corporate debt. Whereas falling household debt curbed consumer spending, rising corporate debt did little to boost investment spending. This is because most of the additional corporate debt went into financial engineering – including share buybacks and M&A activity – rather than capex. In fact, the average age of the private-sector capital stock has increased from 21 years in 2010 to 23.4 years at present (Chart 5). Chart 4Household Debt Has Fallen From Its Highs, While Corporate Debt Has Risen Since The GFC Household Debt Has Fallen From Its Highs, While Corporate Debt Has Risen Since The GFC Household Debt Has Fallen From Its Highs, While Corporate Debt Has Risen Since The GFC Chart 5The Average Age Of Capital Stock Has Been Increasing The Average Age Of Capital Stock Has Been Increasing The Average Age Of Capital Stock Has Been Increasing Buoyant Consumer And Business Spending Will Prop Up The Neutral Rate Today, the US economy finds itself in a far different spot than 12 years ago. Households are borrowing again. Consumer credit rose by $40 billion in November, the largest monthly increase on record, and double the consensus estimate (Chart 6). Banks are easing lending standards across all consumer loan categories (Chart 7). Chart 6Big Jump In Consumer Credit Big Jump In Consumer Credit Big Jump In Consumer Credit Chart 7Banks Are Easing Lending Standards For All Consumer Loans Banks Are Easing Lending Standards For All Consumer Loans Banks Are Easing Lending Standards For All Consumer Loans Chart 8Net Worth Has Soared Over The Past Two Years Net Worth Has Soared Over The Past Two Years Net Worth Has Soared Over The Past Two Years Meanwhile, years of easy money have pushed up asset prices, a dynamic that was only supercharged by the pandemic. We estimate that household wealth rose by 145% of GDP between the end of 2019 and the end of 2021 – the largest two-year increase on record (Chart 8). A back-of-the-envelope calculation suggests that this increase in wealth could boost aggregate demand by 5%.1 Reacting to the prospect of stronger final demand, businesses are ramping up capex (Chart 9). After moving sideways for two decades, capital goods orders have soared. Surveys of capex intentions remain at elevated levels. Against the backdrop of empty shelves and warehouses, inventory investment should also remain robust. Residential investment will increase (Chart 10). The homeowner vacancy rate has dropped to a record low, as have inventories of new and existing homes for sale. Homebuilder sentiment rose to a 10-month high in December. Building permits are 11% above pre-pandemic levels. Amazingly, homebuilders are trading at only 7-times forward earnings. We recommend owning the sector. Chart 9Investment Spending Will Stay Strong Investment Spending Will Stay Strong Investment Spending Will Stay Strong Chart 10US Housing Will Remain Well Supported US Housing Will Remain Well Supported US Housing Will Remain Well Supported Fiscal Policy: Tighter But Not Tight Chart 11Chinese Credit Impulse Seems To Be Bottoming Chinese Credit Impulse Seems To Be Bottoming Chinese Credit Impulse Seems To Be Bottoming As in most other countries, the US budget deficit will decline over the next few years, as pandemic-related measures roll off and tax receipts increase on the back of a strengthening economy. Nevertheless, we expect the structural budget deficit to remain 1%-to-2% of GDP larger in the post-pandemic period, following the passage of the infrastructure bill last November and what is likely to be a slimmed down social spending package focusing on green energy, universal pre-kindergarten, and health insurance subsidies. The shift towards structurally more accommodative fiscal policies will play out in most other major economies. In the euro area, spending under the Next Generation EU recovery fund will accelerate later this year, with southern Europe being the primary beneficiary. In Japan, the government has approved a US$315 billion supplementary budget. Matt Gertken, BCA’s Chief Geopolitical Strategist, expects Prime Minister Kishida to pursue a quasi-populist agenda ahead of the upper house election on July 25th.  China is also set to loosen policy. The Ministry of Finance has indicated that it intends to “proactively” support growth in 2022. For its part, the PBoC cut the reserve requirement ratio by 50 basis points on December 6th. The 6-month credit impulse has already turned up (Chart 11). More Than The Sum Of Their Parts Chart 12The Labor Share Typically Rises When Unemployment Falls The Labor Share Typically Rises When Unemployment Falls The Labor Share Typically Rises When Unemployment Falls As discussed above, the end of the deleveraging cycle, rising household wealth, stronger capital spending and homebuilding, and a structurally looser fiscal stance have all increased aggregate demand in the US. While each of these factors have independently raised the neutral rate of interest, taken together, the impact has been even greater. For example, stronger consumption has undoubtedly incentivized greater investment by firms eager to expand capacity. Strong GDP growth, in turn, has pushed up asset prices, leading to even more spending. Furthermore, a tighter labor market has propped up wage growth, especially among low-wage workers. Historically, labor’s share of overall national income has increased when unemployment has fallen (Chart 12). To the extent that workers spend more of their income than capital owners, a higher labor share raises aggregate demand, thus putting upward pressure on the neutral rate. The Retreat From Globalization Will Push Up The Neutral Rate… Chart 13The Ratio Of Global Trade-To-Output Has Been Flat For Over A Decade The Ratio Of Global Trade-To-Output Has Been Flat For Over A Decade The Ratio Of Global Trade-To-Output Has Been Flat For Over A Decade Globalization lowered the neutral rate of interest both because it shifted the balance of power from workers to businesses; and also because it allowed countries such as the US, which run chronic current account deficits, to import foreign capital rather than relying exclusively on domestic savings.  The era of hyperglobalization has ended, however. The ratio of global trade-to-manufacturing output has been flat for over a decade (Chart 13). Looking out, the ratio could decline as geopolitical tensions between China and the rest of the world continue to simmer, and more companies shift production back home in order to gain greater control over the supply chains of essential goods. … As Will Population Aging Chart 14Most Of The Deceleration In US Potential Real GDP Growth Has Already Taken Place Most Of The Deceleration In US Potential Real GDP Growth Has Already Taken Place Most Of The Deceleration In US Potential Real GDP Growth Has Already Taken Place Aging populations can affect the neutral rate either by dragging down investment demand or by reducing savings. The former would lead to a lower neutral rate, while the latter would lead to a higher rate. As Chart 14 shows, most of the decline in US potential GDP growth has already occurred. According to the Congressional Budget Office, real potential GDP growth fell from over 3% in the early 1980s to about 1.9% today, mainly due to slower labor force growth. The CBO expects potential growth to edge down to 1.7% over the next few decades. In contrast, the depletion of national savings from an aging population is just beginning. Baby boomers are leaving the labor force en masse. They hold over half of US household wealth, considerably more than younger generations (Chart 15). As baby boomers transition from net savers to net dissavers, national savings will fall, leading to a higher neutral rate. The pandemic has accelerated this trend insomuch as it has caused about 1.2 million workers to retire earlier than they would have otherwise (Chart 16). Chart 15 Chart 16Number Of Retired People Jumped During The Pandemic Number Of Retired People Jumped During The Pandemic Number Of Retired People Jumped During The Pandemic To What Extent Are Higher Rates Self-Limiting? Some commentators contend that any effort by central banks to bring policy rates towards neutral would reduce aggregate demand by so much that it would undermine the rationale for why the neutral rate had increased in the first place. In particular, they argue that higher rates would drag down asset prices, thus curbing the magnitude of the wealth effect. While there is some truth to this argument, its proponents overstate their case. History suggests that stocks tend to brush off rising bond yields, provided that yields do not rise to prohibitively high levels (Table 1). Table 1As Long As Bond Yields Don’t Rise Into Restrictive Territory, Stocks Will Recover The New Neutral The New Neutral Chart 17The Equity Risk Premium Remains High The Equity Risk Premium Remains High The Equity Risk Premium Remains High The last five weeks are a case in point. Both 10-year and 30-year Treasury yields have risen nearly 40 bps since December 3rd. Yet, the S&P 500 has gained 2.7% since then. Keep in mind that the forward earnings yield for US stocks still exceeds the real bond yield by 552 bps, which is quite high by historic standards. The gap between earnings yields and real bond yields is even greater abroad (Chart 17). Thus, stocks have scope to absorb an increase in bond yields without a significant PE multiple contraction. Investment Implications Our analysis suggests that the neutral rate of interest in the US is substantially higher than widely believed. How much higher is difficult to gauge, but our guess is that in real terms, it is between 1% and 2%. This is substantially higher than survey measures of the neutral rate, which peg it at close to 0% in real terms (Chart 18). It is also significantly higher than 10-year and 30-year TIPS yields, which stand at -0.73% and -0.17%, respectively (Chart 19). The neutral rate has also increased in other economies, although not as much as in the US. Chart 18Both The Fed And Investors Have Lowered Their Estimate Of The Neutral Rate Both The Fed And Investors Have Lowered Their Estimate Of The Neutral Rate Both The Fed And Investors Have Lowered Their Estimate Of The Neutral Rate Chart 19Long-Term Real Rates Remain Depressed Long-Term Real Rates Remain Depressed Long-Term Real Rates Remain Depressed If the neutral rate turns out to be higher than the consensus view, then monetary policy is currently more stimulative than widely perceived. That is good news for stocks, as it would reduce the near-term odds of a recession. Hence, we remain positive on stocks over a 12-month horizon, with a preference for non-US equities. In terms of sector preferences, we maintain our bias for banks over tech. The longer-term risk is that monetary policy will stay too easy, causing the economy to overheat. This could prompt the Fed to raise rates well above neutral, an outcome that would certainly spell the end of the secular equity bull market. Such a day of reckoning could be reached by late 2023. Two Trade Updates We are taking partial profits on our long December-2022 Brent futures trade by cutting our position by 50%. The trade is up 17.3% since inception. Bob Ryan, BCA’s Chief Commodity Strategist, still sees upside for oil prices, so we are keeping the other half of our position for the time being. We are also closing our short meme stocks trade. AMC and GME are down 53% and 47%, respectively, since we initiated it. While the outlook for both companies remains challenging, there is an outside chance that they will find a way to leverage their meme status to create profitable businesses. This makes us inclined to move to the sidelines.   Peter Berezin Chief Global Strategist peterb@bcaresearch.com Footnotes 1 In line with published estimates, we assume that households spend 5 cents of every one dollar increase in housing wealth, 2 cents of every dollar increase in equity wealth, 10 cents out of bank deposits, and 2 cents out of other assets. Of the 145% of GDP in increased household net worth between the end of 2019 and the end of 2021, 19% stemmed from higher housing wealth, 52% from higher equity wealth, 12% from higher bank deposits, and 17% from other categories.    View Matrix Image Special Trade Recommendations Current MacroQuant Model Scores Image

Highlights Data from the UK revealed it is tantalizingly close to declaring COVID-19 an endemic virus, indicating Britain likely will exit the pandemic ahead of other states soon. The UK is a bellwether market regarding its public-health response to the coronavirus. Some 95% of its population is estimated to carry COVID-19 antibodies (Chart of the Week). Other states – e.g., the US, the EU – have followed the UK with a lag, which we expect will continue. While the Fed's reassurance it will be able to hike rates without disrupting labor markets no doubt encourages markets – and boosted commodity prices – we believe the return to economic normalcy that would be ushed in by endemicity will release pent-up consumer demand for goods and services. This will spur commodity demand. If COVID-19 becomes endemic in enough economies globally, it also would fuel inflation, and inflation expectations.1 Given the tight supplies of industrial commodities – chiefly oil, natural gas and base metals – our assessment of upside price risk is higher now than it was at year-end 2021. We remain long broad-based commodity exposure via the COMT ETF, the PICK ETF, and the S&P GSCI index. Feature Fed Chair Powell's confidence that the US central bank will raise rates and keep inflation under control without destabilizing labor markets stole the show earlier this week. The media credited Powell's remarks for the burst of enthusiasm that lifted commodities as an asset class higher. While none would gainsay the Fed's importance to commodity markets, we would point out the approaching endemicity of COVID-19 in the UK – and the likely follow-on from the US and other large commodity-consuming states – is of equal, if not greater, moment. The UK has been out in front on its public-health response to the COVID-19 pandemic and has become a bellwether in the northern hemisphere; the US will follow. Chart 1 This week, the UK's Office for National Statistics (ONS) reported ~ 95% of England's population tested positive for antibodies to COVID-19 via infection or vaccination in the week beginning 29 November 2021. Similar results were reported for Scotland, Wales and Northern Ireland. This is generally observed in all age cohorts tracked by ONS.2 According to David Heymann of the London School of Hygiene and Tropical Medicine, "population immunity seems to be keeping the virus and its variants at bay, not causing serious illness or death in countries where population immunity is high."3 In a briefing hosted by Chatham House this week, Heymann observed, “And probably, in the UK, it’s the closest to any country of being out of the pandemic if it isn’t already out of the pandemic and having the disease as endemic as the other four coronaviruses” currently in circulation, which are responsible for roughly a quarter of common colds.4 Based on UK government data, the ratios of hospitalizations and deaths to COVID-19 cases has been falling precipitously (Chart 2). This is encouraging, given the sharp increase in cases driven by the rapid spread of the omicron mutant, which appears to be rolling over. Medical experts in the UK suggest the data also point to a possible peaking in the omicron surge. This would lighten the load on hospitals, as well as reduce death rates attributed to the coronavirus (Chart 3).5 Chart 2 Chart 3 Return To Normal? Nothing will return commodity markets to economic normalcy faster than endemicity. If this stays on track over the next month or so, it will spur commodity demand sooner rather than later, as pent-up consumer demand for goods and services is discounted by trading markets. If, as the data appear to indicate, the UK's transition from pandemic to endemic COVID-19 is followed by other states like the US and EU a few months later, we would expect a renewed leg up in the post-pandemic commodities rally. This would be apparent in futures contracts, which already are pricing commodity deliveries a month or more hence. Such a turn of events would force us to accelerate our time table for oil-demand recovery, which we expect will come in 2H22. This could restore our $80/bbl forecast for 2022, and lift our 2023 expectation. We also would have to revisit our copper and base metals view, and bring forward the timing of the copper-price rally we expect will lift COMEX refined copper to $4.80/lb and $6.00/bbl in 2022 and 2023, respectively, on average.6 These industrial commodities would see demand increase amid extremely tight supply conditions. Oil markets are tightening on the back of OPEC 2.0's production discipline, and the inability of many member states to fully restore the 400k b/d every month it signed on for beginning in August of last year, owning to production shortfalls outside the core producers of the coalition (Chart 4). Copper, the base-metals bellwether, remains very tight, as seen in balances (Chart 5) and inventories (Chart 6). Chart 4OPEC 2.0s Strategy Works OPEC 2.0s Strategy Works OPEC 2.0s Strategy Works Chart 5Coppers Physical Deficits Will Persist... Coppers Physical Deficits Will Persist... Coppers Physical Deficits Will Persist... Chart 6Globally, Exchange Warehouses Tighten Globally, Exchange Warehouses Tighten Globally, Exchange Warehouses Tighten China's zero-COVID-19 policy, which has resulted in numerous lock-downs at the local level, has yet to dent oil demand, which, for the time being, is hovering ~ 16mm b/d. We will be updating our oil balances and price forecasts next week, and will have a more extensive analysis of supply-demand balances then. Return Of Speculative Interest Expected With Endemicity Hedge funds have been reducing their exposure to the industrial commodities over the past year, which suggests they either have better alternatives for investing, or did not believe the rallies in commodities over the past year were durable, given the repeated demand shocks visited upon these markets by COVID-19 (Chart 7). We expect that once the pandemic becomes endemic, hedge funds will return to these markets. All the same, given the higher likelihood of price rallies in these markets, we would expect hedge funds to be cited as a cause of higher prices, as typically happens when markets take a sharp leg higher. Regular readers of our research are aware that this generally is not the case – hedge funds follow the news; they don't lead it. This past week we revisited earlier research to see if hedge-fund involvement in commodity markets causes the prices to go up or down to any meaningful degree. And, again, we found no relationship between hedge-fund positioning and the level of commodity prices.7 Chart 7 The presumed influence of hedge funds has been a persistent feature of futures markets in the post-GFC world, following the collapse of commodity prices along with financial markets in 2008. An entire literature has sprung up to explore the influence of these funds on commodity price formation. Below we highlight a few representative articles consistent with our results. Büyüksahin and Harris (2011) show hedge funds and other speculators follow prices – they do not lead them – based on the Granger-causality testing they performed on oil prices and speculative positioning.8 Brunetti et al (2016) argue hedge funds' trading stabilizes markets – i.e., they provide a bid when markets are selling off and an offer when markets are well bid – while swap-dealer trading is uncorrelated with price volatility.9 Knittel and Pindyck (2016) found speculation has reduced volatility in prices since 2004, including during the 2007-08 price run-up.10 Using a straightforward supply-demand-inventory model, they examined cash and storage markets to determine whether speculation had any effect on them or on convenience yields based on cash-vs-futures spreads. They concluded: "We found that although we cannot rule out that speculation had any effect on oil prices, we can indeed rule out speculation as an explanation for the sharp changes in prices beginning in 2004. Unless one believes that the price elasticities of both oil supply and demand are close to zero, the behavior of inventories and futures-spot spreads are simply inconsistent with the view that speculation has been a significant driver of spot prices. If anything, speculation had a slight stabilizing effect on prices." Investment Implications Assuming the UK remains a bellwether for DM economies with reasonably effective vaccine programs, or which have experienced an omicron surge, markets could be close to exiting the COVID-19 pandemic and entering a phase in which the coronavirus is endemic. This would be bullish for demand. And given the extended tightness on the supply side for industrial commodities in particular, it could presage another leg up in prices as economic normalcy returns. We continue to favor broad-based commodity exposure via the COMT ETF, the PICK ETF, and the S&P GSCI index.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Commodities Round-Up Energy: Bullish US LNG baseload and peak liquification capacity is expected to rise ~ 13% this year to 11.4 Bcf/d and 13.8 Bcf/d (on a December-to-December basis), based on the EIA's latest estimates. The agency's forecast for LNG exports is up 17.3% to 11.5 Bcf/d this year, and 12.1 Bcf/d in 2023. With these increases in baseload and peak export capacity, the US is set to become the largest exporter of LNG in the world this year, in the EIA's estimation. This will be integral to US foreign policy, particularly in markets where the US competes with Russia for export sales, in our estimation. Within North America, US pipeline gas exports to Mexico and Canada are expected to average just under 9 Bcf/d this year, a 5% increase vs. 2021, and 9.2 Bcf/d in 2023. Base Metals: Bullish In China, seasonally low production, as stainless-steel firms undergo maintenance, and the upcoming Winter Olympics in February are keeping steel production subdued. To compound this supply shortage, tight raw material markets, particularly that of iron ore and nickel are buoying steel prices. Heavy rainfall in southern-eastern Brazil is curtailing iron ore production in the region. After Australia, Brazil is the second largest iron ore exporter to China. Nickel prices hit a 10-year high on Tuesday on the back of falling inventories. An LME outage also precipitated the price rise. Dwindling inventories point to increasing demand for the metal as electric vehicle companies ramp-up production and sales this year, particularly in China, where the government stated it will remove EV subsidies by the end of 2022. According to The China Passenger Car Association, EV sales in the country will double to 6 million this year. Precious Metals: Bullish Based on the December FOMC minutes, the markets are now pricing in a more hawkish tilt from the Fed, and expect an initial rate hike by March. The Fed may also shrink its balance sheet soon after the initial rate hike, in line with its expectation the U.S. economy will recover faster this time around. While higher nominal interest rates and tighter monetary policy will increase the opportunity cost of holding gold (Chart 8), the commodity-driven inflation we expect this year – especially if COVID-19 becomes endemic across major economies – will buoy demand for the yellow metal as an inflation hedge. An endemic virus this year will also boost physical gold demand from China and India. Chart 8       Footnotes 1     Please see More Commodity-Led Inflation On The Way, which we published on 9 December 2021. 2     Please see Coronavirus (COVID-19) latest insights: Antibodies, published by the ONS on December 23, 2021. 3    Please see Covid-19: UK ‘closest of any country in northern hemisphere to exiting pandemic’, published on January 11, 2022 by msn.com. 4    Please see What four coronaviruses from history can tell us about covid-19, published by newscientist.com on April 29, 2020. 5    Please see Omicron may be headed for a rapid drop in US and Britain, published by msn.com on January 11, 2022 published by msn.com. 6    Please see 2022 Key Views: Past As Prelude For Commodities, which we published on December 16, 2021. 7     We ran cointegrating regressions – using DOLS and ARDL models – to check for any equilibrium between prices and hedge fund positioning and found none. We looked at the post-GFC period from 2010 to now, since this is the data the US Commodity Futures Trading Commission (CFTC) provides for hedge funds and tested whether hedge-fund positions (in the form of open interest) explained prices vs. the alternative (i.e., prices explain hedge-fund positioning). We again found prices explain position (and not vice versa) for crude oil, natural gas, copper and gold. 8    Please see Büyüksahin, Bahattin and Jeffrey H. Harris (2011),"Do Speculators Drive Crude Oil Futures Prices?" The Energy Journal, 32:2, pp. 167-202. This paper used unique data sets provided by the CFTC. 9    Please see Brunetti, Celso, Bahattin Büyüksahin, and Jeffrey H. Harris (2016), "Speculators, Prices, and Market Volatility," Journal of Financial and Quantitative Analysis, 51:5, pp. 1545-74. 10   Please see Knittel, Christopher R. and Robert S. Pindyck (2016), "The Simple Economics of Commodity Price Speculation," American Economic Journal: Macroeconomics 8:2, pp. 85–110. Investment Views and Themes Strategic Recommendations Trades Closed In 2021 Image

Highlights Global equities are poised to deliver mid-to-high single-digit returns this year, with the outlook turning bleaker in 2023 and beyond. Non-US markets are likely to outperform. We examine the four pillars that have historically underpinned stock market performance. Pillar 1: Technically, the outlook for equities is modestly bullish, as investor sentiment is nowhere near as optimistic as it usually gets near market tops. Pillar 2: The outlook for economic growth and corporate earnings is modestly bullish as well. While global growth is slowing, it will remain solidly above trend in 2022. Pillar 3: Monetary and financial conditions are neutral. The Fed and a number of other central banks are set to raise rates and begin unwinding asset purchases this year. However, monetary policy will remain highly accommodative well into 2023. Pillar 4: Valuations are bearish in the US and neutral elsewhere. Investors should avoid tech stocks in 2022, focusing instead on banks and deep cyclicals, which are more attractively priced. The Bedrock For Equities In assessing the outlook for the stock market, our research has focused on four pillars: 1) Sentiment and other technical factors, which are most pertinent for stocks over short-term horizons of about three months; 2) cyclical fluctuations in economic growth and corporate earnings, which tend to dictate the path for stocks over medium-term horizons of about 12 months; 3) monetary and financial conditions, which are also most relevant over medium-term horizons; and finally 4) valuations, which tend to drive stocks over the long run. In this report, we examine all four pillars, concluding that global equities are likely to deliver mid-to-high single-digit returns this year, with the outlook turning bleaker in 2023 and beyond. Pillar 1: Sentiment And Other Technical Factors (Modestly Bullish)   Chart 1US Equities: Breadth Is A Concern US Equities: Breadth Is A Concern US Equities: Breadth Is A Concern Scaling The Wall Of Worry Stocks started the year on a high note, before tumbling on Wednesday following the release of the Fed minutes. Market breadth going into the year was quite poor. Even as the S&P 500 hit a record high on Tuesday, only 57% of NYSE stocks and 38% of NASDAQ stocks were trading above their 200-day moving averages compared to over 90% at the start of 2021 (Chart 1). The US stock market had become increasingly supported by a handful of mega-cap tech stocks, a potentially dangerous situation in an environment where bond yields are rising and stay-at-home restrictions are apt to ease (more on this later). That said, market tops often occur when sentiment reaches euphoric levels. That was not the case going into 2022 and it is certainly not the case after this week's sell-off. The number of bears exceeded the number of bulls in the AAII survey this week and in six of the past seven weeks (Chart 2). The share of financial advisors registering a bullish bias declined by 25 percentage points over the course of 2021 in the Investors Intelligence poll. Option pricing is far from complacent. The VIX stands at 19.6, above its post-GFC median of 16.7.  According to the Minneapolis Fed’s market-based probabilities model, the market was discounting a slightly negative 12-month return for the S&P 500 as of end-2021, with a 3.6 percentage-point larger chance of a 20% decline in the index than a 20% increase (Chart 3). Chart 3Option Pricing Is Not Pointing To Elevated Complacency Option Pricing Is Not Pointing To Elevated Complacency Option Pricing Is Not Pointing To Elevated Complacency Chart 2Sentiment Is Not Exceptionally Bullish, Despite The S&P 500 Trading Close To All-Time Highs Sentiment Is Not Exceptionally Bullish, Despite The S&P 500 Trading Close To All-Time Highs Sentiment Is Not Exceptionally Bullish, Despite The S&P 500 Trading Close To All-Time Highs Equities do best when sentiment is bearish but improving (Chart 4). With bulls in short supply, stocks can continue to climb the proverbial wall of worry.   Whither The January Effect? Historically, stocks have fared better between October and April than between May and September (Chart 5). One caveat is that the January effect, which often saw stocks rally at the start of the year, has disappeared. In fact, the S&P 500 has fallen in January by an average annualized rate of 5.2% since 2000 (Table 1). Other less well-known calendar effects – such as the tendency for stocks to underperform on Mondays but outperform on the first trading day of each month – have persisted, however. Chart 4 Chart 5 Table 1Calendar Effects The Four Pillars Of The Stock Market The Four Pillars Of The Stock Market Bottom Line: January trading may be choppy, but stocks should rise over the next few months as more bears join the bullish camp. Last year’s losers are likely to outperform last year’s winners. Pillar 2: Economic Growth And Corporate Earnings (Modestly Bullish)   Economic Growth And Earnings: Joined At The Hip The business cycle is the most important driver of stocks over medium-term horizons of about 12 months. The reason is evident in Chart 6: Corporate earnings tend to track key business cycle indicators such as the ISM manufacturing index, industrial production, business sales, and global trade. Chart 6The Business Cycle Is The Most Important Driver Of Stocks Over Medium-Term Horizons The Business Cycle Is The Most Important Driver Of Stocks Over Medium-Term Horizons The Business Cycle Is The Most Important Driver Of Stocks Over Medium-Term Horizons Chart 7PMIs Signaling Above-Trend Growth PMIs Signaling Above-Trend Growth PMIs Signaling Above-Trend Growth Global growth peaked in 2021 but should stay solidly above trend in 2022. Both the service and manufacturing PMIs remain in expansionary territory (Chart 7). The forward-looking new orders component of the ISM exceeded 60 for the second straight month in December. The Bloomberg consensus is for real GDP to rise by 3.9% in the G7 in 2022, well above the OECD’s estimate of trend G7 growth of 1.4% (Chart 8). Global earnings are expected to increase by 7.1%, rising 7.5% in the US and 6.7% abroad (Chart 9). Our sense is that both economic growth and earnings will surprise to the upside in 2022. Chart 9Analysts Expect Single-Digit Earnings Growth Analysts Expect Single-Digit Earnings Growth Analysts Expect Single-Digit Earnings Growth Chart 8 Plenty Of Pent-Up Demand For Both Consumer And Capital Goods US households are sitting on $2.3 trillion in excess savings (Chart 10). Around half of these savings will be spent over the next few years, helping to drive demand. Households in the other major advanced economies have also buttressed their balance sheets. Chart 10Plenty Of Pent-Up Demand Plenty Of Pent-Up Demand Plenty Of Pent-Up Demand After two decades of subdued corporate investment, capital goods orders have soared. This bodes well for capex in 2022. Inventories remain at rock-bottom levels, which implies that output will need to exceed spending for the foreseeable future (Chart 11). On the residential housing side, both the US homeowner vacancy rate and the inventory of homes for sale are near multi-decade lows. Building permits are 11% above pre-pandemic levels (Chart 12). Chart 11Business Investment Should Be Strong In 2022 Business Investment Should Be Strong In 2022 Business Investment Should Be Strong In 2022 Chart 12Residential Construction Will Remain Well Supported Residential Construction Will Remain Well Supported Residential Construction Will Remain Well Supported Chart 13China's Credit Impulse Has Bottomed China's Credit Impulse Has Bottomed China's Credit Impulse Has Bottomed Chinese Growth To Rebound, Europe To Benefit From Lower Natural Gas Prices Chinese credit growth decelerated last year. However, the 6-month credit impulse has bottomed, and the 12-month impulse is sure to follow (Chart 13). Chinese coal prices have collapsed following the government’s decision to instruct 170 mines to expand capacity (Chart 14). China generates 63% of its electricity from coal. Lower energy prices and increased stimulus should support Chinese industrial activity in 2022. Like China, Europe will benefit from lower energy costs. Natural gas prices have fallen by nearly 50% from their peak on December 21st. A shrinking energy bill will support the euro (Chart 15). Chart 14Coal Prices Are Renormalizing In China Coal Prices Are Renormalizing In China Coal Prices Are Renormalizing In China Chart 15A Shrinking Energy Bill Will Support The Euro A Shrinking Energy Bill Will Support The Euro A Shrinking Energy Bill Will Support The Euro Chart 16 Omicron Or Omicold? While the Omicron wave has led to an unprecedented spike in new cases across many countries, the economic fallout will be limited. The new variant is more contagious but significantly less lethal than previous ones. In South Africa, it blew through the population without triggering a major increase in mortality (Chart 16). Preliminary data suggest that exposure to Omicron confers at least partial immunity against Delta. The general tendency is for viral strains to become less lethal over time. After all, a virus that kills its host also kills itself. Given that Omicron is crowding out more dangerous strains such as Delta, any future variant is likely to emanate from Omicron; and odds are this new variant will be even milder than Omicron. Meanwhile, new antiviral drugs are starting to hit the market. Pfizer claims that its new drug, Paxlovid, cuts the risk of hospitalization by almost 90% if taken within five days from the onset of symptoms. Bottom Line: While global growth has peaked and the pandemic remains a risk, growth should stay well above trend in the major economies in 2022, fueling further gains in corporate earnings and equity prices.   Pillar 3: Monetary And Financial Factors (Neutral)   Chart 17The Overall Stance Of Monetary Policy Will Not Return To Pre-Pandemic Levels For At Least Another 12 Months The Overall Stance Of Monetary Policy Will Not Return To Pre-Pandemic Levels For At Least Another 12 Months The Overall Stance Of Monetary Policy Will Not Return To Pre-Pandemic Levels For At Least Another 12 Months Tighter But Not Tight Monetary and financial factors help govern the direction of equity prices both because they influence economic growth and also because they affect the earnings multiple at which stocks trade. There is little doubt that a number of central banks, including the Federal Reserve, are looking to dial back monetary stimulus. However, there is a big difference between tighter monetary policy and tight policy. Even if the FOMC were to raise rates three times in 2022, as the market is currently discounting, the fed funds rate would still be half of what it was on the eve of the pandemic (Chart 17). Likewise, even if the Fed were to allow maturing assets to run off in the middle of this year, as the minutes of the December FOMC meeting suggest is likely, the size of the Fed’s balance sheet will probably not return to pre-pandemic levels until the second half of this decade.   A Higher Neutral Rate We have argued in the past that the neutral rate of interest in the US is higher than widely believed. This implies that the overall stance of monetary policy remains exceptionally stimulative. Historically, stocks have shrugged off rising bond yields, as long as yields did not increase to prohibitively high levels (Table 2). Table 2As Long As Bond Yields Don’t Rise Into Restrictive Territory, Stocks Will Recover The Four Pillars Of The Stock Market The Four Pillars Of The Stock Market If the neutral rate ends up being higher than the Fed supposes, the danger is that monetary policy will stay too loose for too long. The question is one of timing. The good news is that inflation should recede in the US in 2022, as supply-chain bottlenecks ease and spending shifts back from goods to services. The bad news is that the respite from inflation will not last. As discussed in Section II of our recently-published 2022 Strategy Outlook, inflation will resume its upward trajectory in mid-2023 on the back of a tightening labor market and a budding price-wage spiral. This second inflationary wave could force the Fed to turn much more aggressive, spelling the end of the equity bull market. Bottom Line: While the Fed is gearing up to raise rates and trim the size of its balance sheet, monetary policy in the US and in other major economies will remain highly accommodative in 2022. US policy could turn more restrictive in 2023 as a second wave of inflation forces a more aggressive response from the Fed.   Pillar 4: Valuations (Bearish In The US; Neutral Elsewhere)   US Stocks Are Looking Pricey… While valuations are a poor timing tool in the short run, they are an excellent forecaster of stock prices in the long run. Chart 18 shows that the Shiller PE ratio has reliably predicted the 10-year return on equities. Today, the Shiller PE is consistent with total real returns of close to zero over the next decade. Chart 18 Investors’ allocation to stocks has also predicted the direction of equity prices (Chart 19). According to the Federal Reserve, US households held a record high 41% of their financial assets in equities as of the third quarter of 2021. If history is any guide, this would also correspond to near-zero long-term returns on stocks. Chart 19Valuations Matter For Long-Term Returns (II) Valuations Matter For Long-Term Returns (II) Valuations Matter For Long-Term Returns (II)   … But There Is More Value Abroad Valuations outside the US are more reasonable. Whereas US stocks trade at a Shiller PE ratio of 37, non-US stocks trade at 20-times their 10-year average earnings. Other valuation measures such as price-to-book, price-to-sales, and dividend yield tell a similar story (Chart 20). Chart 20AUS Stocks Are Trading At A Significant Premium To Their Non-US Peers (I) US Stocks Are Trading At A Significant Premium To Their Non-US Peers (I) US Stocks Are Trading At A Significant Premium To Their Non-US Peers (I) Chart 20BUS Stocks Are Trading At A Significant Premium To Their Non-US Peers (II) US Stocks Are Trading At A Significant Premium To Their Non-US Peers (II) US Stocks Are Trading At A Significant Premium To Their Non-US Peers (II) Cyclicals And Banks Overrepresented Abroad Our preferred sector skew for 2022 favors non-US equities. Increased capital spending in developed economies and incremental Chinese stimulus should boost industrial stocks and other deep cyclicals, which are overrepresented outside the US (Table 3). Banks are also heavily weighted in overseas markets; they should also do well in response to faster-than-expected growth and rising bond yields (Chart 21). Table 3Deep Cyclicals And Financials Are Overrepresented Outside The US The Four Pillars Of The Stock Market The Four Pillars Of The Stock Market Chart 21Rising Bond Yields Will Help Bank Shares Rising Bond Yields Will Help Bank Shares Rising Bond Yields Will Help Bank Shares Bottom Line: Valuations are more appealing outside the US, and with deep cyclicals and banks set to outperform tech over the coming months, overseas markets are the place to be in 2022. Peter Berezin Chief Global Strategist peterb@bcaresearch.com Global Investment Strategy View Matrix Image Special Trade Recommendations Image Current MacroQuant Model Scores Image

Highlights Industrial commodity and ag markets will continue to pull widely followed inflation gauges higher, as global fuel and fertilizer prices remain well bid (Chart of the Week). Unplanned production outages in Libya, faltering supply growth within OPEC 2.0 and a bullish read-through on demand in the wake of relatively mild public-health effects due to the omicron variant will keep oil prices well supported over the short term. Base metals prices will be pulled higher by the ongoing energy crises in Europe and China, which are forcing refiners to shutter capacity as fuels are re-directed to human needs. This is compounded by lockdowns in China – home to ~ 50% of global refining capacity – due to its zero-tolerance COVID-19 policy. These energy crises also are pulling grains higher, as farmers deal with soaring fertilizer costs – driven by soaring natgas prices – this year. Longer term – 2024 and beyond – industrial-commodity production will be concentrated in the hands of a few large producers. More explicit carbon pricing and ESG-induced cost increases will have to be recovered in higher wholesale prices for oil and metals. Grains will remain subject to volatile input costs, and erratic weather. We continue to favor broad-based exposure to commodities vis the S&P GSCI and the COMT ETF. Feature Fundamental supply-demand conditions in commodity markets – largely out of the control of fiscal- and monetary-policymakers – will continue to pull inflation gauges higher this year and for the rest of the 2020s. Oil markets are tight and getting tighter, owing to a dearth of capex since the price collapse triggered by OPEC's market-share war in 2014 (Chart 2). The same is true for base metals, where capex also has languished.1 Chart of the WeekCommodities Continue To Contribute To Global Inflationary Pressures Commodities Continue To Contribute To Global Inflationary Pressures Commodities Continue To Contribute To Global Inflationary Pressures Chart 2 Ag markets are confronting massive cost increases brought about by natgas shortages that first surfaced in 2021 and will continue to dog European and Asian fertilizer markets this year (Chart 3). These tight conditions leave markets vulnerable to unexpected supply and demand shocks, no matter how short-lived they might be. This is easily seen in oil markets: A force majeure declaration by Libya's national oil company following unplanned production shutdowns and pipeline maintenance pulled output below 800k b/d, or 30% lower than November 2021 levels, and almost completely neutralized a supply increase agreed by OPEC 2.0 earlier this week. Combined with what appears to be a relatively sanguine read-through on the impact of surging omicron infections in major consuming markets, these developments took prompt Brent back above $80/bbl.2 Chart 3Tight Natgas Markets Drive Fertilizer/Grain Prices Higher Tight Natgas Markets Drive Fertilizer/Grain Prices Higher Tight Natgas Markets Drive Fertilizer/Grain Prices Higher Oil Price Strength Will Persist Longer term – 2024 and beyond – OPEC 2.0's capacity to increase oil supply will be concentrated in the hands of a few large producers, while US shale-oil producers will face tougher ESG hurdles, which will raise their costs. More explicit carbon pricing also will raise costs. These cost increases will have to be recovered in higher prices. OPEC 2.0’s raison d'être at its inception in 2016 was to regain control over the level of global oil inventories. It has been remarkably successful in this endeavour, despite massive geopolitical uncertainty and a global pandemic (Chart 4). We do not expect any course changes over the coming years. What will change, however, are the fortunes of states in this coalition capable of increasing supply as global demand increases. At present, the Kingdom of Saudi Arabia (KSA) and Russia are the putative leaders of OPEC 2.0, and are two of the five states that can increase production at present (Iraq, the UAE and Kuwait also are in that group). By the end of this decade, the leadership of the coalition could come down to KSA and the UAE. While not certain, the US EIA expects Russia's output to level off and then gradually decline over the course of this decade. (Chart 5).3 Russia will remain a significant producer in the coalition, but it likely will be managing declining output as opposed to fighting for higher market share. Chart 4OPEC 2.0s Strategy Works OPEC 2.0s Strategy Works OPEC 2.0s Strategy Works Chart 5 Producers outside the OPEC 2.0 coalition – i.e., the price-taking cohort – have gone to great lengths to improve the attractiveness of their equity, and to maintain access to debt markets to fund their growth. These goals will not support any effort to increase production at the risk of reducing ROEs, as this would set efforts to regain investors' and lenders' favor back years. Going forward, capital markets, climate activists in board rooms and courtrooms, and an increasing load of ESG-related measures – most not yet even defined – will become central to the price-taking cohort's operations and returns. These will impose additional costs on the production of hydrocarbons, with explicit carbon pricing only one of many costs that will have to be recovered in higher prices. Base Metals Again Hit By Gas Shortages Shortages of natural gas continue to plague Europe: According to Gazprom, the Russian state-owned gas company, the continent has withdrawn more than 45% of total gas injected into storage this year, with peak winter in the Northern Hemisphere still to come.4 Just over 20% of power generation in Europe is gas-fired, which means tight gas markets drive gas prices and power prices higher. This power crunch is hitting the continent’s supply of refined aluminum and zinc particularly hard, which means global supplies also are being hit hard. Europe is responsible for ~ 12.5% and ~ 18% of global primary aluminum and zinc slab production, respectively. Low inventories at the start of winter, and cold weather is forcing European natgas to be directed to human needs at the expense of power generation. This has resulted in shutdowns of aluminum smelters in Europe – e.g., Aluminium Dunkerque Industries France was forced to curb production in the second half of December. Around the same time, Trafigura’s Nyrstar – which has the capacity to produce ~ 5.2% of global refined zinc – also announced plans to shut its zinc operations in France beginning January, citing high power prices. While power rationing has helped stabilize an earlier crisis in the world’s largest refined copper, aluminum, and zinc producer, the odds China’s power crisis will worsen has increased, following Indonesia's coal export ban in January to preserve the fuel for domestic energy security. China’s plans to curb air pollution ahead of the Winter Olympics next month will also dampen refining activity. Base metals also are contending with a new fundamental supply risk: Political uncertainty in the critically important producing states of Chile and Peru, the world’s largest producers of the red metal. Gabriel Boric, the new Chilean president, supports higher taxes on copper mining firms, as does his Peruvian counterpart Pedro Castillo. Boric’s election also signals more scrutiny on ore miners’ environmental practices – putting additional ESG-induced costs into wholesale copper prices. The uncertainty surrounding Peru’s constitutional rewrite, with the possibility for a change in mining rules to favor wealth redistribution and the environment will deter mining investments, according to Diego Hernandez, head of Sonami, the Chilean mining society. In Peru, the motion to and failure to impeach Castillo last month will increase political uncertainty, potentially reducing investors’ faith in the country’s mining sector. All of this has a chilling effect on investment in markets that are starved for capex.5 The lack of stable supply and low inventories have caused major price surges over the last year for industrial metals (Chart 6). We expect prices to rise and maintain higher levels over the course of this decade. Base metals production likely will fall short of demand as the world undertakes the green energy transition. Chart 6Copper Inventories Drawing Hard Copper Inventories Drawing Hard Copper Inventories Drawing Hard Investment Implications Industrial commodity markets are tightening over the short term and are on course to tighten further as the current decade progresses. This will raise the cost of the energy transition, as higher prices will be required to spur new supply investments in base metals, which are the sine qua non for this transition. This also will spur additional investment in oil and natgas supply, since these already have the infrastructure in place to move supply to market in order to meet the rising demand for energy we expect going forward. We will be exploring these themes throughout the year, particularly the implications for policy around the development of carbon-capture technologies – especially in natgas markets – and nuclear power, both of which may be the most "shovel ready" sources of incremental energy supply this decade.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com Commodities Round-Up Energy: Bullish European natgas prices are once again rallying as inventories continue to be drawn down hard due to cold weather, reduced gas supplies from Russia, and higher demand generally (Chart 7). By the end of 2021, European natgas inventories were 57% full, vs the seasonal norm of 72%. At the end of December, close to 50 LNG tankers from the US were sailing to European destinations. As 2022 opens, the European TTF price for natural gas rose 30% to €94/MWh off their recent lows. Cargoes now will be bid in Asia, particularly in China, due to a halt in coal exports during January from Indonesia announced by the government at year end. China had replaced Australian coal imports with Indonesian-sourced material last year. Base Metals: Bullish MMG Ltd’s Las Bambas mine in Apurímac, Peru will restart operations after suspending production in late December. The mine's owner enacted the suspension following a month-long blockade at one of its key roads by the Chumbivilcas community. Prime Minister, Mirtha Vasquez travelled to the region to ensure the conflicting parties reached an agreement.  Las Bambas mine makes up ~2% of global mined copper supply and its tax payments are a significant source of government revenue. While an agreement was reached to lift the blockade, it did not address the Chumbivilcas’ primary concerns. The community wants the mine to employ more locals and provide higher cash contributions to support local infrastructure. This elevates the likelihood of further blockades and supply disruptions this year. Since it commenced operations in 2016, the Las Bambas mine has dealt with blockades over key roads on and off for over 400 days.  Ags/Softs:Neutral Global fertilizer markets will remain tight as natgas prices resume their rally and drive input costs higher. This will contribute to rising food price inflation and may result in global food shortages in 2022. High fertilizer prices might encourage farmers to delay planting this year, in the hope prices will fall. This risks increasing price volatility if too many farmers wait too long to apply fertilizers for their spring crops. Chart 7 Footnotes 1     Please see our most recent update on these factors in 2022 Key Views: Past As Prelude For Commodities, which we published on December 16, 2021. It is available at ces.bcaresearch.com. 2     Please see Libyan crude output falls below 800,000 b/d published by argusmedia.com on January 4, 2022, and Oil futures: Prices steady after OPEC+ hike, Brent close to $80/b published by qcintel.com on January 5, 2022. 3    In its December 2021 assessment of Russia's oil-production potential, the US EIA noted: "… declining output from Russia’s more mature fields (primarily in Western Siberia, Russia’s largest oil producing region) may offset the production growth coming from greenfield development, which may result in Russia’s crude oil production declining by the end of the 2020s decade. In addition to greenfield development, companies are increasing drilling at some existing mature oil fields and are tying in smaller fields to existing infrastructure at larger fields to help increase recovery rates and mitigate some of the production decline. However, brownfield development efforts in Russia are unlikely to reverse the decline in production in the longer term." Please see Country Analysis Executive Summary: Russia, published by the EIA on December 13, 2021. 4    Please refer to Hoping for cheaper gas to come, Europe reverses Russian link to tap storage, published by Reuters on December 30, 2021. 5    Please see Add Local Politics To Copper Supply Risks, which we published on November 25, 2021 for additional discussion   Investment Views and Themes Strategic Recommendations Trades Closed in 2021 Image

Dear Client, This week we present our annual Commodities & Energy Strategy outlook, which contains our key views on the principal markets we cover – energy, base metals and bulks, precious metals, and ags.  Over the coming decade, we expect industrial commodity prices to move higher in an increasingly volatile fashion, not unlike these markets' recent experience.  In the short term, commodity markets will remain exquisitely sensitive to the evolution of the COVID-19 pandemic.  The highly transmissible omicron variant of the coronavirus – now spreading at more than 4x the rate of the delta variant – appears to be less lethal than previous mutations, suggesting it could become the dominant variant globally.  We remain wary, however, particularly as China still is operating under a zero-tolerance COVID-19 policy, and has relied on less efficacious vaccines that appear to offer no protection against the omicron variant of the coronavirus.  This also is a risk for EM economies that rely on these vaccines.  However, the roll-out of mRNA vaccines globally via joint ventures will be gathering steam in 2H22, which is bullish for commodity demand. Longer term, the effort to decarbonize global energy markets is gaining traction, with the three largest economies in the world – the US, China and EU – embarked on a massive transition to renewables.  This will be a multi-decade undertaking that literally could transform the world.  We expect this to continue to unfold in an erratic and uncoordinated fashion, as states work out how to decarbonize the production, delivery and consumption of goods and services.  Markets critical to this transition, particularly base metals, face long odds developing the supply that will be necessary for this effort.  Conventional energy markets – oil, gas and coal – are in a forced wind-down imposed by courts, investors, governments, climate activists, public opinion and policymakers, which is reducing supply at a faster rate than demand.  This leaves markets exposed to volatile price bursts.  As is our custom, this will be the last CES report of the year.  This decade promises to be extraordinary for commodities, and we are hopeful we will continue to be of service in navigating the epic transition to a low-carbon future.  As you gather with friends and loved ones, we wish you all the best in this beautiful season, Robert Ryan Chief Commodity & Energy Strategist Highlights Macro: Bullish. Systematically important central banks will remain wary of moving too strongly too soon, in the wake of the COVID-19 omicron variant. US real rates will remain low and the USD will weaken, which will support commodities. Energy: Bullish. OPEC 2.0 and the price-taking cohort will maintain existing production policies, which will restrain oil supply. The omicron variant likely will dent demand, not tank it. Our 2022 Brent forecast is slightly weaker on omicron risk, averaging $78.50/bbl, with most of the demand hit in 1H22 made up in 2H22, while our 2023 forecast is $80/bbl. Base Metals: Bullish. Supply-demand balances will remain tight. Climate activism in courts and boardrooms; ESG-related costs, local and geopolitical uncertainty will continue to weigh on supply. COMEX copper will average $4.80/lb next year and $6.00/lb in 2023. Precious Metals: Bullish. Rising commodity prices will feed directly into inflation gauges favored by the Fed. Inflation and inflation expectations will remain elevated. Gold will push to $2,000/oz and silver to $30/oz in 2022. Ags/Softs: Neutral. Ag markets will remain balanced, with a bias to the upside from higher costs of fertilizer and transportation. Erratic weather remains an upside risk. Risk: Elevated. On the upside, a less lethal omicron variant that dominates other COVID-19 variants will rally markets. A more virulent mutant would hit demand harder and push prices lower. Hospitalizations/Cases and Deaths/Cases remain the critical ratios – trajectories need to remain flat to downward for growth (Chart of the Week). Recommendations: Our COMT ETF position was stopped out on 13 December 2021, which is when the ETF went ex-dividend. The ETF paid $5.4941/share for an 18.44% dividend (p.a.). Our stop-loss is being overridden, and we remain long the COMT ETF, in the expectation commodity markets will remain tight and backwardation will continue to drive returns. Feature COVID-19 continues to determine the trajectory of global growth – hence commodity demand – and how it will be distributed in the short run. Reports this week indicating the widely used Sinovac COVID-19 vaccine used in China and EM states is ineffective in neutralizing the omicron variant will renew the focus on an underappreciated risk: High vaccination rates in and of themselves are not useful indicators of successful public-health responses.1 More than anything, what appears to matter most is the vaccine that's been used to address the public-health threat posed by COVID-19. A booster of the Pfizer-BioNTech mRNA vaccine, e.g., appears to neutralize the omicron variant, and to convey a higher likelihood of avoiding serious illness and hospitalization.2 Chart 1 This will be important going forward, as the COVID-19 omicron variant appears to be transmitted at a rate that is 4.2x as contagious as the delta variant. This raises the odds that hospital beds will fill faster as the omicron mutant spreads.3 This could again lead to reduced availability of health care, and additional lockdowns to contain the spread of the omicron variant, which would again radiate through global supply chains. Oil Market Outlook Hinges On Omicron Response The risk exposed in these public-health developments is the global commodity recovery – particularly for crude oil and refined products like gasoline and jet fuel – could become more bifurcated this year, with economies using primarily mRNA technology continuing to open and recover. States without access to or distribution of these vaccines will have to rely more on social distancing and lockdowns to contain the spread of the virus. We would expect this to be a powerful inducement to accelerate local production and distribution of mRNA vaccines in Asia, Latin America and Europe. Successful implementation of this strategy would boost commodity demand, particularly for transportation fuels.4 Our prior regarding the omicron variant is it will dent demand but not tank oil demand. To account for the so-far-unknown effects of omicron, we are assuming 1H22 global crude and refined-product demand falls to 100.4mm b/d, versus our earlier estimate of 101.5mm b/d. Most of this demand is recovered in 2H22, when we expect oil consumption to average 101.8mm b/d versus our earlier expectation of 102.5mm b/d. On the supply side, OPEC 2.0 core producers – KSA, Russia, Iraq, UAE and Kuwait – will continue to implement the coalition's production-management strategy – i.e., keeping the level of supply just below demand. Meanwhile, the price-taking cohort led by the US shale-oil producers will continue to focus on profitability, not production for the sake of production. Accelerating production too rapidly at this point would undo much of the work and effort undertaken to establish oil and gas companies as attractive alternatives for investors. Our 2022 Brent forecast is weaker by $1.50/bbl vs last month's estimate, averaging $78.50/bbl. Our 2023 forecast is $1/bbl lower, with our average expectation at $80.00/bbl (Chart 2). Longer term, oil + gas capex remains weak (Chart 3). As we have stressed repeatedly, this is wicked bullish for prices in 2024 and beyond. Chart 2Brent Forecast Slightly Weaker In 2022 Brent Forecast Slightly Weaker In 2022 Brent Forecast Slightly Weaker In 2022 Chart 3 Table 1BCA Global Oil Supply - Demand Balances (MMb/d, Base Case Balances) To Dec23 2022 Key Views: Past As Prelude For Commodities 2022 Key Views: Past As Prelude For Commodities Weak Capex Keeps Base Metals Outlook Bullish Weak capex is a common theme in the industrial commodities – oil and base metals – which points to tight supply-demand balances for these markets going forward. This is as true for base metals as it is for oil (Chart 4). The principal drivers of the capex squeeze are similar in both markets: A desire to regain investors' favor after years of poor returns. This has managements focused on returning capital to shareholders either in the form of share buybacks or higher dividend payments. However, there are additional pressures adding to the cost structures of industrial commodities, particularly the seismic shifts in the political underpinnings of commodity-exporting countries, where left-of-center politicians are proving more attractive to the median voter in states with contestable elections. Once elected – e.g., in Peru, and, likely Chile after this weekend's elections – politicians push hard to secure a greater share of mining revenues for long-neglected poor and indigenous populations.5 Chart 4 The bellwether base metal market – copper – best highlights these factors, which, in our view, will keep base-metals capex tentative and restrained over the medium term. Miners are almost forced to exercise capex restraint until they get greater clarity on how newly elected governments will deliver on their avowed intent to secure a greater share of mining revenues for their constituents. This is particularly true in Chile and Peru – which together account for a combined 40% of global copper ore output – where poor and indigenous populations are engaging in more frequent civil disobedience.6 In addition to the contentious changing of the guard at the political level, ESG-related initiatives brought to the fore by climate activists elected to corporate boards and in court proceedings are adding new layers of cost to base-metals mining (and oil and gas exploration for that matter). This week, Reuters reported on separate court decisions in Australia and Chile that redress mistreatment of aboriginal peoples in key metals-exporting states.7 We believe political and ESG-related costs will raise miners' all-in sustaining costs, which will have to be covered by higher prices going forward. The additional costs that will be imposed on miners trying to meet the demand that will be driven by the global decarbonization and renewable-energy buildout now kicking into high gear will require prices to spur investment in new mine production, and to keep existing and brownfield production up and running.8 Copper prices will get an assist from a weaker USD, which will boost demand for the metal ex-US (Chart 5). We are expecting copper to push to $4.80/lb on average next year and $6.00/lb in 2023 on the COMEX, on the back of stronger supply fundamentals and a weaker USD. Chart 5A Weaker USD Will Boost Copper A Weaker USD Will Boost Copper. A Weaker USD Will Boost Copper. Gold Will Rally As Inflation, Uncertainty Remain Elevated Gold prices will move higher in 2022 – our target remains $2,000/oz – as investors seek cover from higher commodity prices, which will feed directly through to higher inflation (Chart 6).9 This has been apparent in the recent US PCEPI and core PCEPI – the Fed's preferred inflation gauge – and CPI data, and at the wholesale level in PPI data. Most of this results from tight supplies for commodities and strong demand for goods, which is driving the price increases. We expect this to continue into 2022, as pent-up consumer demand continues to drive goods purchases and supply-side tightness for most manufacturing inputs. Higher prices across commodity markets will keep inflation gauges elevated in 2022. In addition to the inflation-hedging demand we expect next year, investors also will turn to gold as a hedge against economic policy uncertainty: As inflation and policy uncertainty increase, gold prices move higher (Chart 7). Chart 6Higher Commodity Prices Will Pressure Inflation Higher Higher Commodity Prices Will Pressure Inflation Higher Higher Commodity Prices Will Pressure Inflation Higher Chart 7Investors Will Use Gold To Hedge Inflation, Uncertainty Investors Will Use Gold To Hedge Inflation, Uncertainty Investors Will Use Gold To Hedge Inflation, Uncertainty   Lastly, in line with our colleagues in BCA's Foreign Exchange Strategy service, we remain USD bears in 2022. As is the case with all commodities, gold will benefit from a weaker USD.10 Ags Remain Balanced In 2022 Global ag markets, by and large, will remain balanced over the current crop year (Chart 8), with a bias to the upside as input and transportation costs – chiefly fertilizers and grain vessels, respectively – remain high (Charts 9 and 10). Erratic weather, as always, remains an upside risk. Chart 8 Chart 9 Chart 10… And Fertilizer Costs Will Push Grains, Beans Higher Natgas Price Surge Pushes Fertilizer Prices Higher Natgas Price Surge Pushes Fertilizer Prices Higher While we remain neutral grains, the periodic price spikes resulting from higher freight rates and natural gas prices will support overall commodity exposures. Over the short term, the risk of higher prices is acute: Markets still are contending with the possibility of another colder-than-normal winter. This would push natgas prices – and, because it is 70% natgas, fertilizer costs – sharply higher next year. This will have to be recouped by higher food prices, particularly if shipping costs spike higher due to COVID-19-induced port closures. Surging food prices will keep inflation rates higher globally, making them more persistent (vs. transitory). Investment Implications Global supply-demand fundamentals continue to support our conviction commodity markets will remain tight in 2022. As such we remain long commodity index exposure – the S&P GSCI and COMT ETF – expecting market tightness to result in renewed backwardation. We also remain long the PICK expecting continued tightness in base metals. Risks to our views remain elevated – and occur in both directions. On the upside, commodities will rally if a less-lethal omicron variant becomes the dominant COVID-19 strain and does not overly tax hospital resources or drive death rates higher. It could actually convey a global benefit as the dominant strain, crowding out other mutations and pushing states to herd immunity. On the downside, it's still too early to tell how this new variant and other mutations will behave. Given the fragility of the current global recovery and reopening shown in the initial response to omicron, a more virulent mutant likely would hit aggregate demand hard, forcing yet another supply-side adjustment in commodities generally. Upside risks dominate in our assessment, but, as always, we remain cautious.   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com   Footnotes 1     Please see Sinovac shot offers inadequate shield from Omicron variant, says HK study published by straitstimes.com on December 15, 2021. The Sinovac vaccine is almost half as effective as mRNA-based vaccines, and is widely distributed in EM economies. We flagged this risk earlier in July in our report titled Assessing Risks To Our Commodity Views; it is available at ces.bcaresearch.com. 2     Please see Pfizer Booster Shots Are Effective Against Omicron Variant, Israeli Study Says published by wsj.com on December 12, 2021. 3    Please see Omicron four times more transmissible than Delta in Japan study published by straitstimes.com on December 9, 2021. 4    Please see Upside Price Risk Rises For Crude, which we published on September 16, 2021, for addition discussion of the global joint-ventures engaged in local production of mRNA vaccines. 5    Please see Add Local Politics To Copper Supply Risks, which we published on November 25, 2021 and Chile: Prepare For A Boric Win, published by BCA's Emerging Markets Strategy service on December 15, 2021. The latter report discusses the growing odds of a victory for the left-of-center candidate in Chile's election this weekend. 6    Please see, e.g., Peru's poor Andean hamlets, backed by state, unleash anger at mines, published by reuters.com on December 14, 2021. 7     Please see Australian mining state passes Aboriginal heritage protection law, and Chile's Supreme Court orders new evaluation of Norte Abierto mining project published by reuters.com on December 15 and 14, 2021, respectively. 8    Incremental investment needed to meet 2050 net-zero climate goals will come to almost $2 trillion per year, half of which will go into renewable power generation, industrial processes, and transportation, according to estimates by Goldman Sachs, published on December 13, 2021. 9    Please see More Commodity-Led Inflation On The Way, which we published on December 9, 2021. It is worthwhile reiterating Granger-causality between realized and expected inflation gauges (US PCEPI, core PCEPI, CPI, along with 5-year/5-year CPI swap rates) and commodity price indices (the S&P GSCI and Bloomberg Commodity Index) is very strong. 10   Please see 2022 Key Views: Tug Of War, published by BCA's Foreign Exchange Strategy service on December 10, 2021.   Investment Views and Themes Strategic Recommendations Trades Closed in 2021 Image