"Fear Is Everywhere"

1560 words – a 4 minute read.

One of the most unusual and likely defining vibes of the current period are the wide gaps that exist between the many different views of reality on offer. Now that folks can pretty much choose their media bubble just like they choose their self-medication I guess it makes sense. It certainly feels like a lot of dispersion in market views as we approach 2024.

Today’s title comes from a Bloomberg article title that I recently came across. It struck me because we don’t see it like that here at TPW Advisory. We get that fear (blood) sells and that today’s chopped up media scene almost requires leading with provocation to get eyeballs but it was so definitive. Mission accomplished for the title creator. Here’s Paul Krugman: “The simple reality of the past year or so is that America has accomplished what many, perhaps most, economists considered impossible: a large fall in inflation without a recession or even a big rise in unemployment.” We’re with him.

Then a day or two later Goldman came out with its 2024 outlook titled: “The Hard Part Is Over” stating that the Fed is done, that US recession odds in the next 12 months are only 15% & that continued disinflation was the most likely course of action both in the US and globally. Of course that was followed by Jay Powell delivering yesterday’s well-timed smack down that coupled with a poor UST auction wiped the grin right off the faces of those riding the 8 day S&P winner.

And then of course there is us, TPW Advisory, who came out with our 2024 Outlook a week ago titled: Surprise, Surprise presenting 4 macro & 4 market surprises. We suggested the global macro stable land is just ahead thus positioning ourselves  at the more optimistic end of perspectives. Now this a normal place for us – recall our Middle Path thesis some 15 months ago when the world was convinced we would be in recession by now. We expect markets to come to our POV as the year progresses.

We are big believers in process and framework, recognizing after 30 + years in global macro land that one can easily get lost without either a framework or a process and that the two tend to work best together. Our Tri Polar World (TPW) thesis, which argues that regional integration in the three poles of Asia, Europe and the Americas is fast becoming the global operating system, serves as our framework. We view Covid, Climate & Conflict (our 3 Cs) as accelerants to this process.

Our process is straightforward: we write our Musings every Friday which we then gross up into our Monthly once a month which is a big lift mentally but ensures that we have all our ducks in a row. Following the Monthly (this week) we update our two models, our Global Multi Asset (GMA) and our TPW 20 thematic model thus drawing a straight line from global macro thinking right down to ETF based model portfolio construction.

We also do a fair amount of video and TV work which we really appreciate, not for the pub but for the work and the requirement to be fluid and crisp in one’s thinking and articulation. This is hugely valuable to the global macro thinker because it forces one to really drill down on what the core message is.

We had a chance to reflect on that this week when we had multiple such opportunities ranging from a 30 minute video with Your Finance where we walked through our 2024 Outlook ( https://www.youtube.com/watch?v=qr3Um5KOmUM)  to a 10 minute hit with the good folks at Negocios TV, Spain’s leading business channel, followed by a midafternoon trip to the floor of the NYSE for a live interview with the Schwab folks ( https://schwabnetwork.com/video/inflation-in-both-the-u-s-europe-will-fall-faster-than-expected) & then on to BTV’s The Open for a coveted solo guest slot with Jon Ferro.

That’s a pretty heavy thinking, writing and articulating schedule: writing the Monthly (6500 words), the client update (every Model client gets a monthly update (1300 words) and today’s Musings (call it 1500 words) and tote it up – its roughly 9k odd words. That’s a lot in a week; combine it with all the video and TV work and one has a tremendous opportunity to go wide & deep, short and shallow.

The net result? A pretty clear view of what we think, why we think it and how we want to position for it.

Here goes: we are quite constructive on the risk asset outlook through December, with current conditions almost tailor made for a YE rally. We offer 4: seasonality ( Nov – Dec best 2 months of yr. for US equity), sentiment (last week’s AAII readings showed most negative sentiment in a year), positioning – retail traders sold more stock last month than any month in the past two years, hedge funds’ net long position is at 5 yr. lows, CTAs are completely offsides and will have to buy back an estimated $150B by YE. Technicals finish up the four with rare Zweig breadth thrusts being noted as we went through last week. Don’t forget Nov – Dec are the best 2 months for stock buybacks as well.

We know how the YE rally story goes; it starts with HF covering their shorts (GS short interest basket up 17% last week) and then extends into HF’s going long. They are joined by the CTAs as noted above, then the active managers join in given their UP as the calendar stares them in the face and finally the retail crowd joins in. Today’s set up is classic YE rally stuff.

What about 2024? Our #1 surprise is lower inflation sooner than expected. We note that both the Fed and ECB don’t expect 2% type inflation until 2025 – we expect it next year (time difference = room for Fed to provide insurance cuts). Supportive US data includes: Y/Y rents down 1-2%, used car prices 18% off peak = record decline & gas prices at the pump down 10% or so in last month.

The chair can caution all he wants – the Fed is done tightening. Lower inflation = lower rates = weaker dollar. Note global Central Banks made over 30 rate CUTS last month – most in 3 years… we are moving from a DM rate hike cycle to an EM led rate cutting cycle.

What about that stability call? Well, we look at macro factors like retail inventory and note that after years of Covid related gyrations all is back to normal. We look at global supply chain indicators from folks like the NY Fed – same story – back to normal. Geo politics one says? We see next week’s meeting between Pres. Biden & Xi as being a perfect example of a major positive getting zero coverage vs wall to wall bloodshed in Israel & Gaza.

What about in cross asset markets one asks? We note the VIX is averaging 17.5 YTD, right in line with its 30 year historical average while even in the topsy turvy Fixed Income world the MOVE index is under 120, well below levels it reached last Spring. LPL notes that yields are back in their normal range after more than a decade below. Finally, we note that the S&P YTD performance of roughly 15% is bang in line with the historical average for Year 3 of Presidential cycles. Normal doesn’t sell papers or attract eyeballs but it does impact price and as the old saying goes: “price pays”.

Ok, so how does one position for this world? Well, as part of our process, we run through the technical charts for all our holdings and various indices every month. One major takeaway is the clear leadership displayed by Big Tech so we want to be part of that. The fear was that higher rates would hurt Tech – as we saw in 2022… what we learned in 2023 is that today’s Big tech is made up of cash machines who benefit from rising rates while continuing to grow earnings and may well be on the cusp of a new AI driven innovation cycle.

We also want to be exposed to those segments that benefit from the lower rates that will come from declining inflation as well as the weak dollar that will follow lower rates and shrinking yield differentials (think BOJ ends YCC > rates go up while Fed cuts rates in US). So when we updated our models this week that’s exactly what we did – add to Big tech, add to rate sensitive segments both in debt and equity while further developing our EM equity play to include more winners from deeper regional integration – this time in Europe. Barchart notes EM equity trades at a 50 yr. relative valuation low to US (didn’t know EM was that old).

Obviously no guarantees we will be right in our views or our positioning but we feel like we have done the work – we have boiled down our views to their essence and we have applied that essence to our models. All that in a week’s work. TGIF for reals!

Shout out to the Horace Mann Lions playing in their football league championship game today! GL to the football Blue Devils tomorrow night vs arch rival Carolina: “nothing could be finer than beating Carolina.”