Be Like Water

1200 words, a 4 minute read.

I don’t know how many more (short) weeks like this I can take… We are big believers in speed  at TPWA: Covid Speed, Climate Speed, Analytical Speed but the speed of the discounting mechanism that is today’s global financial marketplace is quite something to behold.

It strikes me that we should follow Bruce Lee’s famous axiom and “be like water my friend”. The Bruce Lee documentary, “Be Like Water”, is a great watch, not only for the fight scenes  (man, talk about speed, Bruce Lee was “fast’)  but also the scenes of Hong Kong back in the 80s, flying in low over the Harbor and Bruce’s own story, sent to the US with nothing, makes a name for himself, goes back to Hong Kong to become a movie star, does so and then becomes the same in the US and around the world but tragically dies before he can see it play out… much like another guy who spoke a lot of wisdom & died way too young, Bob Marley. 

Last week I wrote: Look to the East, making the equity investment case for Asia as the laggard region, lagging behind in economic terms as well as equity market returns. Japan has been ignored while in 2021 China was one of the world’s worst performing equity markets. So far, so good, with ACWX down only slightly YTD vs ACWI down close to 5% and the US over 6%. Both Japan and China are OPing as China’s PBOC eases monetary policy – a nice counterpoint to the Fed and its implicit and soon to be explicit tightening.

I was on BTV this morning with Jon Ferro who asked me how an investor approaches the current environment when buy the dip becomes a lot harder than it sounds. In response, I noted my years of experience, TPW framework and Global Risk Nexus process and global macro ambit to highlight our approach here at TPW.

I could have also said: Be like water. Here is the Bruce Lee quote: “Be like water making its way through cracks. Do not be assertive, but adjust to the object, and you shall find a way around or through it. If nothing within you stays rigid, outward things will disclose themselves. 

Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend.”

I have always believed that one needs to adapt to whatever market develops and today we have multiple transions underway – transitions I have written about at some length.We are transitioning from Covid pandemic to endemic I believe and from fiscal & monetary stimulus in the US to tightening. Within markets, we are moving from bond bull market to a bear market, from USD strength to weakness, from US, tech led global equity markets to new leadership both sector/style as well as geographic. No less a technical authority than Marty Pring has called it game over for the 13 year run of tech stock leadership in the US.

As such we want to be like water and become the market that we have in front of us. We don’t want to be rigid or assertive, telling the market what it should be doing. Let the market tell us. Focus on the non US DM equity markets, on Cyclical and Value segments within the US, on Commodities across the board, Climate thematics etc.

Cross asset markets (rising rates, Commodity prices) are sniffing out the post Omicron world – a world of strong growth. Peak Fed hawkishness means the fixed income market is pricing in 5 rates hikes this year – way too aggressive given the strong, almost mechanical likelihood of inflation coming down sharply in the Spring as big base #s from Spring 2021 fall out. One year inflation swaps are priced at roughly 3.7% suggesting some market folks expect inflation to nearly halve in the coming year.

Given this, the tech correction should be approaching a near term end as gold’s bounce suggests the real rate move is done for the time being.  FX hedged UST rates are as attractive as they have been in some time. We have had a twin engine equity market: rates fall and growth doing well – rates rise and Cyclical – Value does well. One concern is if the tech selloff becomes untethered and leads to the broad market selling off aggressively – we are less than one percent away from the SPY 200DMAV for ex – a level it has not hit since June 2020. Keep earnings in mind – modest, single digit 2022 DM EPS estimates are not very demanding, especially in the context of a higher nominal growth path.

Much then depends on what that growth outlook looks like a few quarters down the road – is it, as I expect, a world of above trend nominal growth with above average but declining inflation, supported by negative real rates & led by a cashed up consumer, a cap ex boom, an infrastructure build out and in the US the passage of a smaller but still important Build Back Better program that catalyzes the Climate segment of the thematic space. Or is it a world of continued strong inflation or one that sinks back to the pre Covid subpar growth path of 2% real GPD and 1-2% inflation? Will GS be right in its expectation for “persistent pandemic driven efficiency gains”…I expect so.

Netflix down 20% was the headline on BTV this morning – many know that this type of selloff has been happening across the thematic space, the disruptive tech, ARKK space for almost a year. The question is are we at the beginning or the end of such weakness? January, as JPM has pointed out, tends to be good for High beta – the opposite has been the case MTD. I think we are closer to the end in the disruptive tech, climate thematic space – valuation has improved dramatically with ARKK’s median P/S peaking at 33x in 2/21 and now at less than 10x for example, selling at a median P/S very close to the Nasdaq 100 with 2x the revenue growth rates. Technicals suggest an area of support in many cases after a full round trip, sentiment is crap (punch up Cathie Wood/ARKK and feel the angst)and interest negligible.

Arguably if one has the growth view that I have discussed then one should be looking at this space with great interest. If, and granted it’s a big if right here – if this growth path akin to the 2ndH of the 1990s comes to pass (and yes I am well aware most comps of this nature are talking about the tech 2000 crash) then many of these segments will be priced at much higher levels in the quarters ahead.

Enjoy this recent MoneyShow Virtual Expo webinar:     https://drive.google.com/file/d/1hPVe0GR28hCIITVLAJ_0bXItH_8B94HF/view       focused on Thematic Investing in 2022 – dust bin material or put it on the wall? Time will tell.