Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.
Cryptocurrencies: New ETF launches bring cheers; tighter regulations looming
The month of October was eventful for crypto enthusiasts as it marked the debut of two U.S. ETFs linked to Bitcoin futures. The first mover advantage was captured by ProShares as its ETF saw a blockbuster debut on October 18, hitting $1 billion AUM in just two days.1 Ironically, this broke the 18-year old, “fastest ETF to break $1 billion” record, held by SPDR’s Gold ETF.1 Gold and Bitcoin are often pitted against each other by many investors as potential inflation hedges. The second ETF by Valkyrie made its debut on October 21 and raked in around $50 million in assets since launch.1 Though the investors in ETFs tracking Bitcoin futures are susceptible to additional price volatility, tracking discrepancies, and capacity issues, these launches are viewed positively from future product launches and regulatory approval perspective.
While regulators seem to be warming up to the idea of trading cryptos within regulated venues, regulations might become more stringent for stablecoins, whose market cap has quadrupled in 2021 to around $120 billion.3 Tether, with around $69 billion in circulation, is the largest, and is pegged against the U.S. dollar.2 Given the overall size of this market and their underlying investments in marketable securities like commercial paper, regulators and lawmakers are working on bringing in more stringent, and possibly, bank-like regulations. Better regulations in this space may drive further adoption and might also pave the way for the introduction of Central Bank Digital Currencies (CBDC) in the future.4
Rising energy costs
For the first time in seven years, U.S. oil prices were above $85 a barrel at the end of October.5 Demand for oil has peaked to pre-pandemic levels, but supply is just not there. Supply chains have been stretched due to the pandemic and further issues have been created by droughts that have reduced hydroelectric generation capability. History has shown that energy shocks of the past are correlated with inflation and even recession, like in the 1970s. There is some hope that demand will decrease over the winter and oil prices will level out, but that hinges on the severity of the weather.5
The U.S. economy continues to face a tight labor market, with more job openings then job seekers. During the month of August 4.3 million individuals quit their jobs, the highest monthly figure since the Labor Department started monitored this data.6 While nearly half a million workers were involved in work stoppages before the COVID-19 outbreak, the current tight market has given labor unions and other dissatisfied workers an opportunity to renegotiate their employment terms or find better positions. Across the country, hundreds of thousands of workers are striking in objection to long hours, unfair work conditions, and insufficient wages in the face of rising inflation. Labor groups are emboldened to seek better compensation, as many companies are posting better than expected earnings, recovering quickly from the global recession.7
COP26 talks about climate crisis, makes pledges, fails to move needle significantly
World leaders gathered in Glasgow, Scotland this week to convene the 2021 United Nations Climate Change Conference (a.k.a. COP26). Despite coming only months after a summer that featured the hottest month ever recorded on Earth, expectations for meaningful incremental pledges to reduce greenhouse gas emissions heading into the conference were low.8 The leaders of the People’s Republic of China (PRC) and the Russian Federation – the world’s largest carbon emitter at present and a top hydrocarbon producer, respectively – were not in attendance, and the PRC’s representatives left the country’s target to hit peak emissions before 2030 unchanged.9 The PRC did, however, formalize its plan to reach net-zero by 2060.
Many participants did sign on to the Global Methane Pledge to cut emissions of the potent greenhouse gas 30 percentage by 2030, though some of the largest emitters of the gas declined to sign on to the nonbinding pledge.10 Additionally, more than 100 countries signed on to another nonbinding pledge to end deforestation by 2030, notably including Brazil, the government of which has earned global ignominy for allowing rapid deforestation of the Amazon rainforest in recent years to turn a major carbon sink into a net carbon emitter.11 Perhaps as meaningful was India Prime Minister Narendra Modi’s surprise announcement that his government plans to set the country on course to hit net-zero emissions by 2070, which marked the first time that all major emitters have pledged carbon neutrality.12 Turning to the world’s largest historical emitter of greenhouse gasses, the United States, President Biden returned from the conference to receive further evidence that his infrastructure package’s green ambitions have shrunk; a major component of his infrastructure package intended to reduce the carbon intensity of the electricity sector (i.e., the Clean Electricity Payment Program) continues to face stiff opposition from fossil fuel interests and appears unlikely to make it into the final budget reconciliation package.13
In aggregate, these mixed results appear to move the dial down somewhat from the 2.7 degrees Celsius of warming over pre-industrial levels by 2100 that the United Nations estimated the world was on track to hit prior to COP26 – well above the Paris Agreement’s 1.5 degree target.14 However, they fail to change course significantly enough to avert catastrophic warming that promises to intensify severe weather, degrade biodiversity and crop yields, and curtail economic growth.15 A recent estimate from Swiss Re forecast that the effects of climate change would cleave anywhere from 11-14 percent off global GDP by 2050 on the current emissions trajectory.16 At this point, that appears to be the course the blue dot’s economies are charting.
Economic data revolution
Macroeconomic decisions have long been focused on backward looking data, but the pandemic-induced gap between the real economy and reported data has become impossible to ignore. Spurred by supply-chain disruptions, sporadic demand, and frustrated consumers, we may be on the brink of an economic data revolution.17
The rapid digitalization across all sectors of the economy has given rise to the ubiquitous use of sensors, mobile apps, and rapid payment mechanisms. This is increasing the speed and accuracy at which we can observe real economic activity using metrics such as the number of restaurant reservations and supermarkets offering discounts. Large firms like Netflix and Amazon are already using this type of instant data to monitor demand, and with big data becoming more common-place, governments are beginning to experiment and embrace this influx of more timely data—so much so that today’s renowned economists are now looking at bank balances and credit card bills to determine the supply of money rather than burying themselves under pages of theoretical equations. Some fear big data hubris or a lack of privacy, while others welcome the prospect of more accurate and timely economic intervention.18
- Jamie Gordon, “ProShares bitcoin ETF risks hitting futures contract limit after breaking record to $1bn,” ETF Stream, October 22, 2021, https://www.etfstream.com/news/proshares-bitcoin-etf-risks-hitting-futures-contract-limit-after-breaking-record-to-1bn/
- Zeke Faux, “Anyone Seen Tether’s Billions?” Bloomberg BusinessWeek, October 7, 2021, https://www.bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether?
- Andrew Ackerman and AnnaMaria Andriotis, “Biden Administration Seeks to Regulate Stablecoin Issuers as Banks“, The Wall Street Journal, October 1, 2021, https://www.wsj.com/articles/biden-administration-seeks-to-regulate-stablecoin-issuers-as-banks-11633103156
- Ian De Bode, Matt Higginson, and Marc Niederkorn, “CBDC and stablecoins: Early coexistence on an uncertain road,” McKinsey & Company, October 11, 2021, https://www.mckinsey.com/industries/financial-services/our-insights/cbdc-and-stablecoins-early-coexistence-on-an-uncertain-road
- “How soaring energy costs could hobble the covid-19 recovery,” The Economist, October 23, 2021, https://www.economist.com/finance-and-economics/2021/10/23/how-soaring-energy-costs-could-hobble-the-covid-19-recovery
- “Striketober: American workers take to the picket lines,” The Economist, October 23, 2021, https://www.economist.com/united-states/striketober-american-workers-take-to-the-picket-lines/21805726
- Editorial Board, “Big Labor and the Supply Shortage,” The Wall Street Journal, October 17, 2021, https://www.wsj.com/articles/big-labor-and-the-supply-shortage-united-auto-workers-union-strike-deere-company-11634336590
- Kasha Patel, “July 2021 was Earth’s hottest month ever recorded, NOAA finds,” Washington Post, August 13, 2021, https://www.washingtonpost.com/weather/2021/08/13/july-2021-hottest-record-month/
- “China Delivers Blow to Climate Summit With No New Targets,” Bloomberg News, October 28, 2021, https://www.bloomberg.com/news/articles/2021-10-28/china-leaves-key-climate-targets-unchanged-before-cop26
- Jim Tankersley, Katie Rogers, and Lisa Friedman, “With Methane and Forest Deals, Climate Summit Offers Hope After Gloomy Start,” New York Times, November 2, 2021, https://www.nytimes.com/2021/11/02/world/europe/climate-summit-methane-forests.html
- Alex Fox, “The Amazon Rainforest Now Emits More Greenhouse Gases Than It Absorbs,” Smithsonian Magazine, October 26, 2021, https://www.smithsonianmag.com/smart-news/amazon-rainforest-now-emits-more-greenhouse-gases-it-absorbs-180977347/
- Adam Vaughn, “COP26: Why India’s 2070 net-zero pledge is better news than it sounds,” NewScientist, November 2, 2021, https://www.newscientist.com/article/2295762-cop26-why-indias-2070-net-zero-pledge-is-better-news-than-it-sounds/#ixzz7BL5EWTDy
- Coal Davenport, “Key to Biden’s Climate Agenda Likely to Be Cut Because of Manchin Opposition,” New York Times, November 3, 2021, https://www.nytimes.com/2021/10/15/climate/biden-clean-energy-manchin.html
- Akshat Rathi and Eric Roston, “UN Warns World Is on Course for Catastrophic Warming of 2.7°C,” Bloomberg Green, October 25, 2021, https://www.bloomberg.com/news/articles/2021-10-25/un-says-world-on-course-to-warm-2-7-c-based-on-current-plans
- Renee Cho, “How Climiate Change Impacts the Economy,” Columbia Climate School, June 20, 2019, https://news.climate.columbia.edu/2019/06/20/climate-change-economy-impacts/
- “World economy set to lose up to 18% GDP from climate change if no action taken, reveals Swiss Re Institute’s stress-test analysis,” Swiss Re Group News Release, April 22, 2021, https://www.swissre.com/media/news-releases/nr-20210422-economics-of-climate-change-risks.html
- “A real-time revolution will up-end the practice of macroeconomics,” The Economist, October 23, 2021, https://www.economist.com/leaders/2021/10/23/a-real-time-revolution-will-up-end-the-practice-of-macroeconomics?itm_source=parsely-api
- “Enter third-wave economics,” The Economist, October 23, 2021, https://www.economist.com/briefing/2021/10/23/enter-third-wave-economics?itm_source=parsely-api
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