Boom, BOOM!

1635 words, a commercial break read.

Well, it’s not often one gets to enjoy weeks like this one. After writing Buy The Laggards last Friday we have enjoyed the Chinese policy fireworks setting off the best week for China equity since 2008. What started off as a buy the Fed rate cut boom has morphed into a buy global risk assets BOOM set off by multiple coordinated monetary & fiscal policy moves by the Chinese Govt.

It brings to mind the old adage to buy on the sound of cannons; well, this is buy on the sound of metaphorical cannons. It’s a fusillade that has one’s ears ringing and eyes watering. It kills dead global recession fears. If you aren’t bullish risk, you are in the wrong business. 

 At TPW Advisory, we are more bullish risk assets on both a NT (into YE) and a long term basis (global macro blue sky thesis 2023-2027) than we have been since the Covid lows.

Here's why. Let’s begin with the underlying twin strands of economic and market strength we have written about previously. First, the global economy’s ability to withstand a rapid rate hiking cycle without suffering a recession. Second, global equities ability to not only absorb a sharp pullback in its tech leadership but to reach new ATHs while the poster child, Nvidia remains some 15% BELOW its ATH. Its called Rotation Not Recession ( link) to reuse the title of our latest Monthly.

We now have the Fed telling us we are at the onset of a long rate cutting cycle that will extend into 2026, syncing up perfectly with our blue sky thesis. We have noted the history of Fed rate cuts without a recession and how the SPY responds – it aint bearish. This week brings China’s policy moves, boosting global liquidity, the life blood of risk assets & making it very clear stocks are not going lower… the PBOC put.  Our old MS buddy Jordi Visser posted a neat chart on Twitter noting that China’s M2 is twice the size of the US. Global liquidity is surging as the Corssborder Capital folks keep pointing out. That is not bearish.

Here in the US we have the famed Money Market Mountain (MMM) which just crossed the $6.7T mark, setting a new ATH. As we return to stability, (global macro surprise #3), now adapted as an OECD headline describing the global economy, we expect to summit the MMM as folks gradually put that money to work in higher yielding risk assets. BofA: “MMF assets peaked ~9 months after 1st cut in past 5 cycles”. That too syncs up very nicely with our blue sky thesis.

Here's JPM:” If there is one thing we can learn from past rate-cutting cycles, it’s that cash is likely to underperform as yields fall. In all but two of the last 12 cutting cycles, bonds have outperformed cash with SPY +16%, Hi Q bonds + 12% and cash + 4% in soft landing cutting cycles”. In other words, stocks return 4x as much as cash... good bye MMM!

With global monetary policy fully on board, one can add the global readoption of industrial policy as another support to our multi year blue sky outlook. China led off with its focus on clean energy and as a result now dominates the entire space, one of the most critical areas of global activity, right up there with AI.

The US, under Pres Biden and VP Harris, recognized the challenge this posed and responded with the most aggressive US policy mix since the 1950s, one that resulted in the US having the best growth and inflation profile of any developed economy post Covid, data that was just reinforced this week with updates to the last few years economic stats. The Chips Act, Infrastructure Act, IRA all served to get the US back in the game of producing key elements of the modern economy – clean energy and semiconductors among others.

Imitation is the sincerest form of flattery and that’s what the EU aims to do as the Tri Polar World (TPW) of regional integration/competition comes ever more into view. Mario Draghi’s recent EU Competitiveness report on how Europe can compete in a world where the clean energy & AI uplands are being dominated by China and the US is basically to do more of what the US is doing – full stop.

Of course, one needs the right team to execute the blueprint which has been laid down by China, adopted in its own fashion by the US and will likewise be tailored for the EU’s purpose (one hopes). Thus, political continuity is critical to sustain the public private investment partnership essential to succeed in these very capital intensive endeavors.

Say what you want about China’s political structure but President Xi is not going anywhere and his imprimatur this week on China’s double barreled policy shifts clears the political road for economic action. Stephen Jen, former MS FX strategist, made the very good point that: “Very weak domestic demand in China is not only bad for China’s economy and well-being but is also undermining China’s security.  Thus, boosting domestic demand now would also make sense to better prepare China to face potential new tariffs and other trade sanctions from a wider range of markets.”

We have been very clear on our view (now becoming common wisdom) that a Harris Presidency that sustains the current US economic policy mix is vastly preferable to the Trump economic plan such as it is. We note that the EC under Ursula von der Leyen has unveiled its new leadership team for the next five years. Thus, all three TPW regions  arguably have or soon will have established policy & political continuity. Does one want to bet against that set up? We don’t think so.

If liquidity is the lifeblood of risk assets, earnings are what drives the train. As we enter Q3 earnings season, Micron’s results this week which included boosting next quarter’s forecasted EPS by 13% while noting it is already sold out of product through 2025 or so is indicative of the demand cycle that underlies the semiconductor space. We note that semiconductors are an early cycle indicator, supporting our global macro surprise #4, that we are early cycle not late in the global economy. UBS predicts the AI industry's revenue will grow at a ~72% CAGR from $83B in 2024 to $420B in 2027. Right in line with our multi year blue sky outlook.

This past week showed the benefits of investor patience in both the China tech & commodity space as both just rocked. We have argued for same time that the risk reward in China tech was quite favorable given our 2 tech stack divide thesis, its oversold condition, that the bad news was in the price, valuations were at record lows etc. etc. KWEB, an important holding in both our Global Multi Asset (GMA) model & our TPW 20 thematic model portfolio was up some 20-25% in the past week and is now OPing the Qs YTD. You gotta be in it to win it.

Same with several of our commodity holdings including UNG, COPX and URNM; all have moved materially in the past few weeks as it becomes clear that no recession is coming, that the global rate cutting cycle is in its infancy and will last for years, that the two main economies of the world, the US and China, are picking up ( the first time in some years that both are in sync), that inventory levels are very low and demand is likely to accelerate ( nuclear power, AI, data centers anyone) etc. etc. Dr. Copper has broken out, up close to 20% in the past 6-8 weeks. The A$ is breaking out as well – a pretty reliable global macro tell.

Of course one needs to participate with eyes wide open; KWEB’s ST RSI is over 80, probably not the thing to buy today. But zoom out on the charts and note that it has basically done nothing for several years and could easily  move significantly higher in the months ahead. It’s worth noting that while US tech is close to ATH’s, KWEB is some 200% BELOW its ATH of $100+ - check it out.

It's absolutely key to understand that KWEB is illustrative not unique. The Thematic space, the commodity space, the cyclical sectors (BofA FMS notes: Biggest relative OW in defensives vs cyclicals since May'20), the small cap space, the non-US equity space – all these segments of the global cross asset markets are filled with opportunities on a long term basis. 

This is what really floats our boat – the syncing up of a multi-year economic, policy and political environment on a Tri Polar World scale that aligns with the significant upside still available in many parts of that cross-asset space. TPW Advisory & its clients are here for it – are you?

Let’s end with yesterday’s David Tepper CNBC clip which is legit must see TV. Tepper is one of the world’s best active hedge fund managers and he is all in, all in on China equity. We are with him. Now if he could only run the Carolina Panthers with the same ability. https://x.com/SquawkCNBC/status/1839284348622680105

Speaking of football, its Duke – Carolina tomorrow followed by Alabama – Georgia. As a Dukie I am much more focused on how much we will beat the Tarholes by; as a college football fan I fully intend to be watching that Bama – Bulldog game. High level college football is a joy to watch – getting all those players & staff lined up to execute under pressure for a sustained period of time is impressive and exciting to watch. There is a reason why the most watched events on TV are college and pro football. GO DUKE! GTHC, GTH!!!!