If you have been a subscriber to Venture Society over the past year, you know how much I love to write about baseball.
Well, one of my favorite baseball adages is for opportunistic batters to “hit it where they ain’t.”
For those who are diamond-deficient, what that means is that if a fielder isn’t covering a certain area, your chances of getting on base increase significantly if you hit the ball in that general direction.
The same thing happens to be true in markets… When something bad happens in one area, something good is usually happening somewhere else.
And this week, that something has to do with the COVID-19 delta variant, and how it is running rampant through unvaccinated areas of the world.
So, just to give you an idea of how I operate, my work week usually begins each Sunday night when I check in on the opening of Asian markets and peruse any economic data that’s released.
This particular Sunday, however, was a bit of a quandary, as markets — like China’s Shenzhen CSI 300 — had solid opens despite the effects of the delta variant in Asia-Pacific and continues to rally.
But the Asia-Pacific-focused Purchasing Manager’s Indices (PMI) for manufacturing were just abysmal.
Interpreting PMI Manufacturing data is straightforward — below 50 means the industrial sector is contracting, and above 50 means it is expanding.
Generally, figures between 48 and 52 imply steady activity. But large deviations outside that range — like we see above for Indonesia and Malaysia — mean something fairly big is afoot.
And in the case of the Asia-Pacific region, that “something fairly big” is a huge outbreak of the delta variant of COVID-19 in several of those countries.
Indonesia, Thailand, Vietnam, Malaysia and Japan are all posting higher new caseloads than at any point in time during this pandemic.
And although Japan — currently hosting the Summer Olympics — has yet to lock down, each one of the other four countries has implemented some form of heavy restrictions.
Even Australia — at just 230 new cases per day — has called in the military to enforce government lockdowns in Sydney.
Effect on the US of the Delta Variant in Asia-Pacific
Although the outbreak of the delta variant in Asia-Pacific and other foreign countries poses no direct and immediate risk to the U.S., we know very well what happens when key manufacturing and logistics countries shut down temporarily…
And so when I view Monday morning’s comparatively strong ISM Manufacturing data for the U.S. (pictured below) through that lens, it gives me some pause about the direction our industrial economy is headed.
First off, it’s odd to me that Markit estimates manufacturing accelerated last month, while ISM believes it slowed.
But when I crack it open, the story becomes clearer.
Supplier deliveries, inventory levels, export orders and imports all declined while a “backlog of orders” went up.
Only one of those things is positive — supplier deliveries — as it represents shorter times between an order and its fulfillment. In other words, it represents a normalization of the supply chain.
The others indicate that we’re actually slowing purchases simply because we can’t get product — which is why prices paid fell.
But because the United States is an importing nation, what happens in Asia is a leading indicator for what happens here.
If the delta variant in the Asia-Pacific region leads to slowing, it means that in about a month or so…
Imports will slow. Then supplier delivery times increase again. Then inventories draw down further.
And the prices that we have to pay for raw materials or to bring goods into the country will continue to ramp higher.
Guess who pays for that?
U.S. consumers, that’s who.
What That Means for Inflation
Remember, after posting last week’s 12.2% year-on-year Q2 GDP growth — the highest level in 70 years — the low-hanging fruit of the economic recovery will be all tapped out. And that growth rate will begin to decline.
But all this data I talked about indicates that inflationary pressures are going to be with us in one form or another for a good while longer.
To sum it up in an equation, slowing GDP growth plus high or accelerating inflation equals stagflation.
And while central banks around the world are desperately trying to push the “transitory” narrative — the frequency of the word in recent speeches (pictured below) is absolutely cartoonish — they’re neglecting to mention one key piece of information…
Source: Arbor Data Science
Inflation can be both “transitory” and “high for a really long time.”
So where in the world can investors turn to look for emerging opportunities?
Hit It Where They Ain’t
Turns out, it’s pretty simple.
If Asia is trending bearish due to Delta Variant, and the US has peaked thanks to easy year-on-year comparisons, then look to countries that have already experienced what’s going on in Asia, and are on the downslope of new cases rather than the upswing.
In other words, look to Europe and India.
Both areas are on the downslope of new cases, but their governments have been far more restrictive than the (very much more permissive and vaccinated) United States.
And while we’re not exactly sure which ones are going to benefit more or benefit sooner, we can simply spread smaller stakes over the whole complex.
So instead of the usual quarter stake, I would suggest taking an eighth stake in each of the following country-level ETF’s: the iShares MSCI United Kingdom ETF (NYSEArca: EWU), the iShares MSCI India ETF (NYSEArca: INDA), the iShares MSCI France ETF (NYSEArca: EWQ), the iShares MSCI Germany ETF (NYSEArca: EWG) and the iShares MSCI Switzerland ETF (NYSEArca: EWL).
Remember that during stagflationary periods, it pays to move out of small cap names and into larger cap, more established markets.
And I can’t think of any more established markets than countries themselves.
Hit it where they ain’t, folks…
All the best,
P.S. Following the Swarm “could have returned over 63,000%”
No, that’s not a typo. For almost a century, there’s been only one trading strategy that could have turned a $5,000 account into $3.1 million.
That strategy? Follow the Swarm.