2020 Sharpening Lines of Distinction
Happy Friday,
Jay was on Bloomberg Radio Tuesday evening discussing recent market action in a nice 7 minute clip. RECORDING
The lines are being drawn for a period, perhaps multi-year, of ROW equity outperformance vs the US. USD weakness is likely to provide a key tailwind.
Our Tri Polar World (TPW) framework: regional deepening in Asia, Europe & the Americas driving the geo economic & geo political landscape, highlights several key issues.
First is the continued poor relative US response to Covid -19, a poor response that is building on itself as the White House (apparently) gives up, testing & tracing remains inadequate & the outlook for school openings & economic recovery in the coming months appears increasingly subpar.
This poor US response extends to the discussions around a 5th stimulus program as the WH and the Republican Party bicker while House Democrats await with their $3T proposal passed several months ago. As hard as it is to believe, press reports suggest the WH wants to cut funding for the CDC and testing/tracing.
Compare this US response with Europe’s agreement on a Joint Recovery Fund that beat expectations, involves unprecedented & significant joint debt issuance, a dovetailed approach with Europe’s Green Deal and a 7 year budget that sets the stage for Europe to deepen its integration and solidify the Euro’s global reserve currency role over the coming years.
The distinction between US fumbling and BTE European integration reinforces our view that the 2020s could be Europe’s Decade.
Beyond the sharpening distinction between the US and Europe/Asia on reopening & economic recovery (note China’s 3% Q2 GDP growth or Europe’s much better than forecast July PMIs) there is US political risk which seems to be rising by the day.
President Trump’s handling of the virus has led to tanking poll numbers, putting Senate control in play. This assures an ugly campaign season ahead with Trump deciding to run a dual campaign bashing China on the one hand and claiming to be the domestic law & order candidate on the other. With Biden proving immune to the Trump playbook, both strategies are deflection plays to avoid Covid-19.
The rapid deterioration of US - China relations benefits no one; a War of Words is one thing but dual consulate closings is more reflective of a new Cold War & neither economy is strong enough for that. US antipathy to China has meant that becoming self-reliant in key technologies is THE driving force in Chinese economic policy. How that helps America is unclear.
This week’s news that Ant Financial will list in both HK and Shanghai and NOT in NYC is another own goal for the Trump Admin - how that helps the US maintaining global financial leadership escapes me.
The domestic, law & order part of Trump’s campaign is already setting cities & states against the President raising concerns about Presidential overreach and Constitutional concerns while deepening divisions within the country. How that helps the US do a better job on Covid -19 is unclear.
Talk is already shifting to what a Biden Presidency might mean and how anticipated Republican obstructionism will place the US further and further behind a more rapidly recovering & integrating Europe and a growing Asian ecosystem led by China and increasingly inhospitable to US companies.
Thus we come to the USD which has been the globe’s FX of choice for close to a decade. Now anywhere from 15-20% overvalued, down in 10 of the past 11 trading sessions, the dollar could be in for a multi-year decline.
Exploding fiscal deficits, collapsing rate premiums, broad topping technicals, light non $ positioning coupled with the longer term and more strategic issues noted above suggest dollar weakness could be the tail that wags the asset allocation dog - providing quite the tailwind for precious metals & non US asset outperformance.
With August almost upon us, seasonality starts to rear its ugly head - SPY weakness could be required to remind DC why more stimulus is needed. A possible double top in tech could reinforce this potential weakness while setting the stage for a shift from Growth to Value and Cyclicals.
While US based investors are not really welcome in Europe or Asia, thanks to that US Covid -19 response, they would do well to dust off their atlases and get familiar with what's happening abroad.
Stay cool my friends!
TPW Investment Management Team