Catch Up Is OK

1550 words – a 4 minute read.

Folks are catching up to our POV & that’s ok. After the past few months, quarters and even years feeling lonely out on the edge, envisioning things others thought unlikely, it now feels like we have lots of company. For a while there we felt like travelers on the Tibetan plateau seeing things that others didn’t – mirages in other words.

Today, we see things coming to fruition, especially across our 4 for 24 macro surprises. The bigger point is that others have now converted to a similar vision to one extent or another. Thus, sentiment and positioning, among other things, are now much less favorable than they were 3-4 months ago when we wrote “Fear is Everywhere". Hat tip, Barron’s Bet on the Bull cover!

Dr. Ed Yardeni notes: “During the week of October 11, 2022, the Investors Intelligence Bull/Bear Ratio (BBR) fell to a cyclical low of 0.57. The previous bear market bottomed the next day... The BBR jumped to 4.20 this past week to the highest reading since the week of December 19, 2017.”

Today’s fear is FOMO fear and so many have gotten long Big Tech, AI and the semi trade. That’s fine; its how markets work – a process of gradual conversion. Dr. Ed hopes for a period of calm and is holding to his YE 5400 SPY target. He would rather have it hit around YE than in the next few months.

We agree and are focused on the equity bull market’s sustainability which can & should include modest pullbacks and periods of choppy trading.

We do note that macro surprise #1: lower inflation, sooner than expected, has hit a bit of a speed bump given recent US price data. We remain comfortable with our view that inflation will continue to moderate in the US and allow the Fed to reduce rates this summer (June now 65% likelihood).

We expect the ECB to cut in June as well; here’s Marc Chandler: “We expect the ECB to be reassured by the next two CPI reports. In March and April 2023, eurozone inflation rose by a combined 1.5%. As these drop out, with conservative assumptions, the headline rate may be near (and possibly below) 2% (from 2.6% in February).”

We take comfort in the number of market segments that are working, a rotation that is the life blood of a long running bull market. We have highlighted the cyclical breakouts in the US & the strong performance of ACWX with both Japan and Europe making new highs. We note RSP (equal weight S&P) just hit a new ATH.

We continue to point to segments like EM and Commodities for fresh money as both have solid upside as we wrote just last week . Our timing was good; copper rose 5% this week for its best week in 14 months as supply concerns met potential growth pick up hopes. This week’s supply worries centered around droughts in Africa.

Here's Adam Tooze: “Zambia relies on hydropower for about 85% of its electricity generation and water levels at Kariba, the world’s biggest man-made freshwater lake, have plunged to 15% of storage capacity — meaning power will have to be rationed. Zambia's state power utility will on March 11 start rolling blackouts lasting eight hours daily. It plans to ask mines in Africa's second-biggest copper producer to cut their power use by as much as 25%.”

We note that COPX, a healthy position in both our Global Multi Asset (GMA) model & TPW 20 thematic model, has smashed through its 200D Resistance and is up over 20% from its recent low a mere month ago. It is pressing up against its 52 week high ($42.4) as copper futures break thru the $4 pp level.

Dr Ed again: “The S&P Goldman Sachs Commodity Price index is down 31% from its March 8, 2022 peak. The CRB raw industrials spot price index (which does not include energy commodities) is down 21% since its record-high peak on April 4, 2022. Those peaks occurred when Russia invaded Ukraine in early 2022.” We seem to be in agreement with Dr. Ed on a number of things; we are happy in his company.

Its not just copper; gold of course is also breaking up and out. We see a similar breakout in the oil patch with XLE up a hot 15% since its recent low two months ago. This comes after Brent had been becalmed with Bloomberg reporting Brent crude futures volatility had recently hit its lowest levels since Jan 2020.

Bloomberg also noted a major shift in the IEA outlook: “Global oil markets face a supply deficit throughout 2024, instead of the surplus previously expected, assuming that OPEC+ continues output cuts in the second half of the year, according to the IEA. The IEA also bolstered forecasts for world oil demand growth in 2024 by 110,000 barrels to 1.3 million barrels a day.”

We remain significantly OW Commodities in our GMA model based on our view that a multi year period of better than expected global growth lies ahead. This is where the crowd has yet to congregate and thus where we see continued significant upside. Macro surprises #3 & 4 – our return to stability thesis and belief that we are early cycle not late underpin our POV. In regards to our Trillion Dollar Reward thesis, New Edge notes that MMF YTD returns are .9% vs ACWI up 6% or so.

John Kovolos of MRA Advisors notes: “that it has been over 500 days since the VIX doubled. That is the third longest streak since the 2009 secular low and the longest since Feb 2018 during Volmegendon.” We note that the UST MOVE index has broken back under 100, suggesting limited inflation concerns & reinforcing that return to stability.

As we have noted, a global rate cutting cycle, abundant global liquidity and back to back double digit years of US EPS growth and stock buybacks for both 2024 and 2025 provide further support for our thesis. Last week it was Goldman & stock buybacks; this week its BofA & earnings: "We raise our 2024 S&P 500 EPS to $250 (+12% YoY) from $235 previously (+6%). We also launch our 2025 EPS at $275 (+10% YoY).”

Here at TPW Advisory, we continue to see upside in EM equity and debt and remain OW. If we are correct in our MT thinking the laggard areas of the risk space should participate over time. Marc Chandler notes that EM FX has been solid of late, up 3 weeks in a row for its best run since last October; USD weakness could catalyze both further Commodity upside & EM outperformance.

One catalyst for that weak dollar could be the BOJ’s decision to exit its NIRP and YCC policies. We have highlighted the importance of real wage gains to ensure sustained inflation (yes, Japan wants and needs inflation). Well, the Shunto has concluded with the largest union association, Rengo, securing an average 5.3% wage gain, ahead of expectations and last year’s 3.8% which itself represented the highest wage gain in 30 years.

As such there is a growing sense that the BOJ could move as early as next week or at latest in April to exit its long standing policy mix, leading to higher domestic rates (albeit slowly) and an expected rebound in the Yen which Bloomberg reports “is at the weakest for the effective exchange rate in 33 years, and for the real effective rate since 1970.”

A large Yen move higher could drive repatriation of foreign investment holdings; Japanese stock market implications could cut both ways though history shows rising yen & stock prices can go together. Bloomberg consensus has Yen at 140 by YE vs 148 today. Our former MS colleague, Stephen Jen, is more aggressive with a 130 target.

China is critical for broad EM to work; though there is plenty of interest and ability to invest in EM equity ex China via EMXC for example. We note that China has been moving higher since late January as Govt jawboning, National team buying and signs of some policy success combined with the big 4 of seasonality, sentiment, positioning and technicals have all supported a risk asset bounce.

Marc Chandler notes that Inflation is even picking up: “China reported consumer prices rose by 0.7% year-over-year in February, apparently helped by spending over the Lunar New Year holiday. It is the first such increase since last August and was well above expectations.”

The CSI 300 is up roughly 15% since hitting a 5 year low in early February. KWEB, for example, is up roughly 15% off its recent low and is testing its 200DR ($27). It has not been above that key level in well over a year.

We noted two big anniversaries this week; the GFC bottomed 15 years ago while four years ago the WHO declared Covid a global pandemic. Remember & reflect.

Spring has sprung here in NYC where the temps are in the upper 60s. As such Spring Break beckons; TPW Advisory is off next week so no Musings on the 22nd. We will be back in print on the 29th! Have fun & don’t forget the sunscreen!