The biggest Put option that equity markets have ever seen?

What a bizarre week last week was. Tapers, $550 billion more Biden spending, exponential put options, gas guzzling super yachts and siestas.

COP26 copped a lot of flak during the week and it’s little wonder given the hundreds of gas guzzling private jets and super yachts spiriting in billionaires, seemingly converging on a massive fundraising convention.

And then there were the afternoon siestas, set to the tune of Greta Thunberg and friends as they pumped out ‘You can shove your climate crisis up your arse’ and while I have no idea what Sir David Attenborough was humming behind that mask, it was clear Boris Johnson liked it and thought it soothing enough to declare siesta.

But thanks to Greta & Co., there now seems to be sufficient social pressure on Governments and companies to deal with climate change, so regardless of the comedy last week there were a few big and serious reality checks offered up, aside from the many chewy stretching green target promises offered by billionaires.

For me, the big moments were when Mark Carney and Janet Yellen placed somewhere between $100 to $130 trillion on the global cost to get to net zero over the next three decades.

It’s a jaw dropping price tag that weeks earlier Bank of America had sized up and called it in at closer to $150 trillion, with spending building up to $5 trillion per annum by 2030 - and $5 trillion per annum thereafter, in perpetuity. Gulp?

Forgetting about what an ‘in perpetuity’ calculation would look like at a zero interest rate, the first amount of up to $150 trillion is around about half of the current global debt stack – a debt stack that’s taken over 100 years to achieve.

Doing the math that would be $450 trillion plus incremental deficit and fiscal spending.

And at the same time, US Fed Chair Powell announced the start of the balance sheet taper. And while he has flat out said ‘no’ to the interest rate lift off until there is full employment, the bond market is front-running the Fed and demanding higher yields while the equities market is set for a continued bull run.

But the reality is that in light of the climate fight price tag, global deficit funded sovereigns and a near-on $300 trillion global debt stack plus the ongoing war against COVID and broken/tariffed/squeezed supply chains as well as moderating GDP - call it $450 trillion plus plus plus - it is highly unlikely that we will see materially and persistently high central bank funds rates for many years to come.

The Bank of America case assumes that central banks fund only 20% of the $140 trillion out to 2050. But it also offered two further cases where the centrals would need to finance 80% to 100%. You can see the issue if they need to foot the entire bill.

Central banks and treasuries will merge and the U.S. Fed (while the US dollar is the reserve currency) will be required to leave the money creation machinery on, full speed. QE Infinity Black Hole?

So, it may be that COP26 might have signalled the crossing of the world economy past the QE Infinity black hole’s event horizon because the cost of dealing with climate change (if that fighting fund has to be created before it can be spent) will depress interest rates for decades, and inflate asset prices to the moon, thereby potentially creating a $150 trillion ‘Put’ or floor under equities, crypto/Defi and some transitional commodities.

It’s hard to think about anything that would make Powell’s $8.5 trillion balance sheet look measly, but this would qualify. Please tell me I’m wrong.

See you in the markets, there’s now only two.

Mike