As The Tri Polar World Turns: Don't Get Swept Away

1500 words – a 4 minute read – full piece at bottom: 6k words, 26 charts & tables from 19 sources.

 EXEC SUMMARY

Its been a pretty tough stretch for long only investors like ourselves. Thus, this month’s title: don’t get swept away by all the negativity which NDR notes has culminated is its Extreme Pessimism Indicator breaking below the March SVB lows.

We want to fight that trend, anchor ourselves to our medium term outlook and continue to be guided by our four signposts along the path to stability & the $1T in reward money.

We view the past few weeks as another example of Market Speed, a theme of ours for the past several years. We have witnessed the long end of the UST market reprice to reality (no recession, solid growth outlook) at warp speed, crushing TLT and XLU among others (both now with ST RSIs hovering at 20 & below).

There are many possible explanations floating around: foreign selling of UST (no data support), too much supply (ditto), hedge funds piling on with record UST short positions (V plausible), pricing out a return to the 2010-2019 period (bingo).

We think we are close to the end of this bond selloff, in part because everyone is freaking out over the rising term premium which we are told is not “directly observable”. The bond market has been wrong of late; wrong about recession, wrong about Fed rate cut path & is locked in a vicious bear market – we don’t want to take our cues from it.

We believe the growth repricing should be welcomed as long as it doesn’t create a crisis (no sign) and that post reality comes stability and from overshoot comes opportunity. We think the next few months will look quite different & the risk of asset price reversal is high – Fed is done, inflation moderates, growth is solid, earnings rise, China and Europe bottom, the USD rolls over. Stay the course.

CLIMATE

The meta point: “the number of places humans can safely live is now shrinking. Fast. The size of the board on which we can play the great game of human civilization is getting smaller”. Let that rattle around the brain for a bit.

3 areas of focus this month – the battle for global EV superiority; the poor performance of renewable stocks as business resets & uranium’s new bull market – just getting started.

China’s BYD is breaking into Europe and challenging Tesla as the global EV production leader – it trades at 19x forward vs TSLA at 60x. Renewables, especially wind and solar have been repriced with a vengeance over the past few months, especially on a relative basis to fossil fuels – we remain bar belled.

Uranium is setting up for a strong bull market as commercial inventories have fallen back to levels last seen in mid 2000s when its price spiked to $145 per lb. vs $45 today.

ECONOMICS

Amidst the immense confusion about where the global economy sits & where it is headed, we remain focused on our 4 signposts end route to macro stability.

First is continued disinflation in both the US & EU. Core PCE data last week suggests the US is en route to the Fed inflation target; falling rents will sustain that. Europe has several months of Y/Y comps that should support its disinflation path.

Second, is the global manufacturing recovery we have posited for the past several months. It is in train as recent PMIs in the US and China would suggest. September Manuf PMIs in both countries were BTE with China back above 50 for 1st time since March and US at 49. The shift from inventory de stocking to restocking will drive this process next year.

Third is rising earnings revisions which we should get a good feel for in the coming weeks with Q3 results and an early look into 2024.

Fourth is the drips and drabs of Chinese policy stimulus gaining traction & driving the economy onto a higher growth path. We are confident that China will have V easy Y/Y comps thru Q1 given severe lockdowns a year ago. Golden Week has been golden with many activity indicators up 100% + vs 2019.

POLITICS

Tired of the cross asset carnage? One can always tune in to the clown show that is the US House of Representatives or perhaps even better TV the reality show that is former Pres. Trump’s civil fraud case in NYC which is shredding his bogus “art of the deal” personae in real time. Its like The Apprentice only true.

No more aid to Ukraine is the Far Right’s battle cry – Ronnie Reagan must be rolling over in his grave as the Putin wing of the party doesn’t even realize the benefits of supporting Ukraine & bleeding Russia for pennies on the dollar.

Elsewhere we look to China and a busy Fall for Pres. Xi which is rumored to include a meeting with Pres. Biden on the sidelines of the Nov APEC meeting in San Francisco. We expect policy refinement not bazooka style stimulus from China in the months ahead.

POLICY

DM rate hikes are tired; EM rate cuts are wired.  US FFR is now 1.5% above core PCE prices, the most restrictive monetary policy since 2007. EU Q3 CPI ran at an annualized rate of 2.8%.

We expect solid global growth in 2024 led by the manufacturing recovery noted above and supported by a global cap ex boom that will in turn be powered by an AI inspired productivity surge akin to that enjoyed by the US from 1995 – 2004.

We expect the BOJ to exit YCC as Japan has defeated deflation while PM Kishida prepares a suppmentary budget to sustain growth, growth that should benefit from China’s pick up.

China is less than a year removed from its strictest lockdowns – experience elsewhere suggests it takes a year for consumer confidence to recover and drive consumption – which is what we expect in the coming months and quarters.

We have shifted from a period of monetary policy ascendancy (2008- 2020) to an age of Big Govt to deal with the 3 Cs of Covid, Climate & Conflict. This shift implies the ascendancy of fiscal policy which we expect will support growth especially in the US and EU but globally as all 3 Cs are global in scope.

MARKETS

Hard to believe we are in almost the exact same situation as a year ago – rates spiking, dollar soaring, SPY imploding – almost to the day (SPY bottomed on 10/12/22). We expect a similar cross asset outcome now as then given extended trends, record short HF positions in both UST and stocks, CBOE put -call ratio over 1.50 for only 9th time in 17 years etc.

Seasonality is about to flip to some of the strongest months of the year – as stability returns, we think market indicators like seasonality should return to some prominence. The quadruple threats facing US risk assets: shutdown, strike, gas prices, student loan repayments should fade as earnings come through and inflation continues to moderate.

We have been completely out of the UST market for the pasts several years in our Global Multi Asset (GMA) model, avoiding the worst ever bond bear market completely. We are becoming tempted for a trade and see scope for the 10 yr. to rally back towards 4.3-4.5%. Real rates are at 15 yr. highs and with a V negative correlation between SPY and real rates any relief there should spell upside for stocks.

We remain OW global equities with a focus on non US where valuations relative to history are extremely compelling. In the US we note that energy, financial and homebuilders have all been hit hard in the past few weeks and trade at very compelling valuations.

We continue to see China as the single best global risk reward trade thru YE and note it has OPed the US over the past month and quarter. EM equity more broadly looks appealing with Mexico and Brazil both getting whacked the past two weeks.

The real question is the USD wrecking ball. It too is very extended & up 12 weeks in a row – best run in roughly a decade. If we are correct in our NT US rate view together with our China and EU growth view then the dollar should roll over. 

We remain OW Commodities as well given our growth view & see recent oil and copper weakness as good opportunities to add in front a stronger than expected 2024 global growth outlook. 

We see potential for an aggressive reversal of recent cross asset trends & don’t see the appeal of selling here. As the search for stability draws to a close and we enter 2024 with better growth prospects, lower risk asset valuations, O/S risk assets and a bond market that has priced in reality we are confident that our TPW 20 and GMA models are well positioned.

Enjoy the video clip from Wed’s BTV Surveillance hit where we cover the rates, stocks and our China call.https://www.bloomberg.com/news/videos/2023-10-04/pelosky-doesn-t-expect-ten-year-yield-to-hit-5-video?sref=ftskAWJe