Brazilian Beach Walk

Happy Friday,

Tricky transitions challenge investors, much like the transitions that challenge Brazilian beach walkers when rivers reach the sea as I learned in Bahia this past week. Ocean waves crashing in, river current pushing out, no clear pattern, can't tell the depth but have to cross to continue the walk. As investors we too have to continue the walk.

We are in the midst of several transitions. In the US from tax cut stimulated growth to more normal (lower) growth and in the Rest of the World from growth slowdown to slow upturn (China, EU, EM). US Treasury are rallying on slower US growth (though today’s response to weak PCE # suggest rally is ebbing) while commodities and stocks suggest better (ex US) growth ahead… Dr. Copper up 3% today, 12% for the Q while commodities are Q1’s best performing asset.

Back in NYC & prepping for Wednesday’s Bloomberg Daybreak appearance (good clip here) it struck me that the transition to “lower for longer” can apply to global growth as well as rates. This idea builds off the work TPWIM has done on Potential Growth Rates (PGR) and Neutral Rates of Interest (NRI) both fundamental parts of our Global Risk Nexus Scoring System.

In the clip I discuss how investors need to recalibrate to a world of lower Developed Market growth rates & thus lower rates of interest. The Fed recalibrated and the result was a shift from “Autopilot” to no cuts in the space of a few months.

Our focus remains on the consumer and here the news remains pretty good especially outside the US. German has record low Unemployment Rate (UER) and very strong retail sales (+4.7% y/y), and there is better than expected Japanese UER (2.3%) - maybe Japanification isn't all that bad.

Lower for longer growth is a pretty good environment for risk assets… less risk of being upended by CB tightening in return for more muted return profiles. Yield plays remain attractive. A growth scare suggests when all clear is sounded on China - EU growth moves will be big (Q2 IMO).

The 3 Steps for risk assets remains intact: Anticipate, Confirm, Reallocate. Q1 risk asset performance provides the anticipation, we await confirmation of ex US growth bottoms this coming quarter and expect that to spur reallocation outside the US which in turn will spur a weaker USD.

Have a Great Weekend!

Jay & Jamie