Easy Come, Easy Go?

Happy Friday the 13th! Spooky, spooky, like the quant quake on Monday’s Pfizer vaccine news that catalyzed a Growth /Value factor reversal so extreme it should virtually never happen. But it did - like I said, spooky.

And now, just days later, the surging US Covid 19 case count coupled with an immobilized Trump Admin (immobilized other than chasing victory ghosts through the courts) have folks questioning the sustainability of the Rotation Trade kicked off by the vaccine news.

Keep calm and carry on. After several months of sideways action, equity markets have made up their minds and are going higher, appreciably higher in the months and quarters ahead. We are in a new bull market as we suggested in May.

The Rotation Trade: sector, factor, asset and geographic wise is not a 2-3 day flash in the pan. No, it is most likely the beginning of a multi year move that will cement a Value resurgence, non US equity leadership and a bear market in long duration DM Govt debt.

As we have pointed out since the Spring, the US is 3rd in the Covid line; we can see what Asia does and Europe too. Asia of course has conquered the virus and is reaping the benefit via global equity mkt leadership & a return to pretty full normalization (take a look if you are wondering what Q3 2021 will look like in the US and EU).

Europe is back in lockdown but real time mobility data suggests the lockdown is nowhere near as negative for the economy as it was last Spring. Data suggests the EU supply chain is running at 94% of capacity as borders stay open, factories and building sites too. German truck mileage (good fit with IP) is running at February levels. Finally cases are rolling over in a number of countries (Belgium, Holland, Ireland etc).

What this juxtaposition between an ever closer vaccination process and rising cases does provide is another bite at the Rotation apple. After all, do you really want to buy an instrument up 10, 15, 20% in a week with an RSI over 80? No, you do not and neither do I. So when things sell off a bit and oversold conditions get worked off then one wants to be building positions as we discussed here (TV) and here (Radio) on Bloomberg Monday night.

BofA has called “the secular low in UST bond yields” and we agree. Breaking through the .95% technical level on the 10 year and pushing 1.75% on the 30 year heralds a significant change in asset allocation in the years ahead.

Did someone say inflation? No, no one did but folks will in the coming quarters - data points of the day: single family house rents rose an average of 3.8% across 60+ US markets in Sept while the biggest single family home rental company raised its October asking rents 7.5%, the 5th increase in a row and most since 2014.

As one starts to think about 2021 one of the key Qs is how high will rates go? Bloomberg 10 yr UST YE 21 consensus is roughly 1.3%. I think it will be between 1.5-1.75% and don't expect the Fed to play YCC until it threatens 2% given the Fed’s desire for inflation.

Rising rates are important not only in terms of % allocation to bonds, hedging vehicle choice etc but also for what rising rates means for the mega cap growth stocks that have led US equities higher and now make up anywhere from 30-40%+ of the S&P.

Duration risk has risen considerably as rates have fallen; rising rates are “kryptonite” for big tech which is also firmly in the cross hairs of regulators across the Tri Polar World (TPW), from DC to Brussels and on to Shanghai.

Speaking of the TPW, one must note this weekend’s signing of Asia’s RCEP, which will be the world’s largest FTA, encompassing roughly 30% of both global GDP and population. Big W for China which will increasingly set Asian trading norms and expand Asian regional integration, linking Chinese production & SE Asian consumption. Where is the US in this epic effort one might ask? No where must be the sad reply.

Another key 2021 Question: will Growth crash or will Value rise to meet Growth? I think Value will rise to meet Growth which will be a relative underperformer in the coming quarters and years. Thus one wants to think about equal weighted rather than cap weighted index exposure ( SPY most top heavy in 45 yrs) & one wants to be overweight the non US markets rather than the US, which has been the only game in town for a decade.

One new area to consider, Latin America… long out of favor, but with a cyclical bias and perhaps most interestingly very undervalued FX. An old MS buddy, a real FX expert, did the #s recently and reported for example that Brazil’s Real is close to 50% undervalued on his work. 50% undervalued - now that covers a multitude of sins.