Nascent bull market in energy, crypto rally stalling

In equities, tech has been all the rage over the past couple quarters and since the Covid low. That’s why I was surprised when Kevin Muir pointed out that energy has been the best performing sector since the Covid low.

Source: Macrotourist

Energy has also been the second best performing sector this year.

Source: Macrotourist

If one believes that tech have run too far too fast, energy would be an interesting sector to look at. XLE just broke out of a two year range to a new all time high close last Friday.

XLE weekly chart

The oil exploration ETF also broke through a trendline last week.

XOP weekly chart

Energy tends to follow global cyclical trends. The US has been chugging along with a strong economy, and China is starting to join the party with a nascent recovery. Their manufacturing PMI just crossed back above 50.

China manufacturing PMI

Global shipping volumes are picking up meaningfully.

Source: Cross Border Capital

Paid subscribers know I’ve been bullish oil every since Brent broke above $84. This is just the beginning of a bull market in oil and commodities in general. With the amount of US Federal debt outstanding, it is in the Fed’s interest to allow core PCE inflation to hover between 2.0-3.5% (a range where they can maintain credibility) and for nominal GDP to be in a robust 5-7% range, as this helps bring the debt/GDP ratio lower over time. An elevated (but not runaway) inflation regime is not something to fear - it is a source of opportunity for investors to profit as it’s an environment that produces significant asset inflation and allows corporate earnings (dominated in nominal terms) to grow meaningfully. Even if I am wrong in the short term and inflation and employment numbers inflect weaker from here, we would see a powerful easing response to support the economy and market, effectively providing a strong Fed put for the market.

Now, on to the paid subscriber section, where I discuss how I’m positioning for the new bull market in commodities and explaining why I’m lightening up on my crypto exposure.