Peak Fed
Happy Friday,
Jay did a Bloomberg TV & Radio back to back last night; his prep notes make up the bulk of these Musings.
The Fed has limited ability to move the needle - for either the economy or markets - that's our conclusion after this week’s Fed meeting & equity market reaction. We have entered Peak Fed.
After all the talk about liquidity driven markets, investors now face the same turn as policy makers: future economic and market drivers will be fiscal policy led not monetary.
Regime changes are in play across the globe & in virtually every sphere: climate, equality, policy, politics & markets. Our TPW framework & Global Risk Nexus (GRN) structure continue to serve us as excellent guides.
The portfolios that have led this yr and in past years (US, tech equity, long bonds, USD) are unlikely to lead in the years ahead.
And so to Fiscal, S&P weakness is pushing on an open door. The White House is desperate for a stimulus deal, for at least 3 reasons: first, the pushback from CDC and others about the imminence of a vaccine, second, the clear sense that the economy is slowing, while third & perhaps most important, US early voting is underway.
Yes that's right, votes are being cast as you read - there’s been a ton written on how the decision won’t be on Election night but rather Election Week or Month but the key today is to note early voting has begun. That colors everything.
Most importantly, underneath the record setting Nasdaq pullback and the subsequent sloppy trading, the rotation trade continues. The trade is both sectoral and style driven as well as geographic in its breadth.
Given a likely stimulus deal (WH is essentially negotiating with itself & Rep Senate - could they cut Trump loose?) coupled with the advent of rapid testing (Big 10 football!) and a vaccine in coming months (Speed of Science) the rate back up we expect to act as the fulcrum for the shift from Growth/Momo to Value/Cyclicals is coming closer by the day. Some rough #s: S&P Growth down 6% MTD, S&P Value down less than 1%. Tech down 8%, Materials up 6%.
The geographic shift is underway; from US to the non US markets which represent cheap & under owned value and cyclicality without any of the US election risk and ham handed fiscal delay. The delay in providing fiscal support is likely to impact US Q4 and 1H 2021 GDP and not in the right direction. Weak econ = weak stocks, weak stocks = weak economy. Rough MTD #’s ACWX up 1%, Japan up 2.5%, Europe up 1% and surprise S&P down 4%.
Contrast the inability of the US system to extend stimulus with that of Europe where France, Germany and Holland have all done so in the past few weeks. The money quote: “Great, call me when he’s at $2.2T”. House Speaker Pelosi to Treasury Sec. Mnuchin on Wed phone call.
It's worth noting the wide spread between how the US is viewed by the rest of the world: the worst in the past 20 yrs according to Pew Research and the record wide valuation gap between US and ROW equity. Tech has been a mighty shield.
Did you catch any of EU Commission President von der Leyen’s speech this week about the EU, its Joint Recovery Fund (JRF) and Green Deal? Things are happening in Europe & its medium term strategic direction is being set; the latest example being joint issuance of roughly $250 B in green bonds - hitting 2 birds with one stone - joint issuance and green bonds. Could they become a European safe asset?
This week’s EU money quote: “The EU has to define its own interests, has to be strong and independent - from both China and the US. This is crucial to be successful in the 21st century”. Bruno Le Maire, French Economy Minister. Ahhh, Tri Polar World anyone?
Within our Tri Polar World construct, Germany is leading European integration while China is doing the same in Asia with its dual circulation strategy. Lacking US leadership, the Americas are stuck in Neutral.
The world is in the early stages of a synchronized global recovery, the first in over a decade. The service PMIs of Germany, China, US support this as does the abundant global liquidity with M2 now roughly $9T, well above the levels seen in 2009 and enroute to possibly $15T by mid-2021 according to JPM.
Earnings revisions have bottomed and Q3 GDP #s should be a blowout while Q3 EPS season is also likely to be BTE; one should not be bearish here. Positioning is much better and sentiment has also improved sharply (less bullish).
As we have noted for some time, investors should be positioning for the equity rotation & away from the USD & long duration Sov debt… a mini taper tantrum is increasingly feasible in the months ahead.
Starting to feel like Fall here in NYC, have an amazing weekend!
TPW Investment Management Team