From Confusion Comes Clarity

1640 words – a 5 minute Duke – Carolina halftime read. GTHC, GTH!

We continue to make progress in our move to Substack and hope to see you there in the coming weeks.

It has been quite the week so TGIF to all! As a reward we get to move the clocks forward here in the US – while losing an hour’s sleep is never great its well worth it to get another hour of daylight.

We can use a little light, right, a little warmth? A little sunshine after the cold, dark & dreary days of winter.  Good news! From where we sit, the clouds of confusion are parting, and some  clarity is starting to shine through.

The investing superpower we wrote about some weeks back in Stoic Strategy has helped part the seas of policy confusion & discord. Imagining all scenarios and thus fearing none prepares one for the endless back & forth on Trump and tariffs or Trump & Ukraine.

Ignoring what the president or his cabinet says frees us up to focus on what he does. Here things are becoming clear.  We believe Trump does have a plan and it includes a weak US economy and a positive outcome for Russia in the Ukraine. One can stand aghast at both of these but our Stoic strategy requires us to face reality.

Intentionally weakening what has been the G7’s best performing post Covid economy may seem nuts but a weak US economy provides lower rates and helps achieve a bigger tax cut which is the end objective of Trump’s domestic economic policy. It also sets up a weak dollar so while the financial press is abuzz about a potential Mar a Lago accord the reality is its already underway – DXY is down from 110 to 103 & change – how many strong dollar comments have come out of the WH, or Bessent or Lutnick? Zero.

The Trump end game for Ukraine has become clearer by the day. The US under Trump has switched sides and now favors rapprochement with Russia over Ukraine, NATO, its own treaty obligations or pretty much anything else. The calculus seems to be peeling Russia away from China will allow the US to reduce its military commitments to Europe and reallocate to Asia, thus saving money (tax cuts) while better deterring China from whatever territorial ambitions it supposedly has. Ummm, ok.

We will analyze Trump’s plans more in depth in next week’s Monthly. Today we want to focus on what the markets are telling us about them. Here there is no confusion, no ambiguity. Investors are voting with their feet, fleeing the epicenter of US exceptionalism, the MAG 7, in favor of China tech (KWEB) in one of the cleanest and clearest rotations from one sector & country to another that one will ever see.

The globalization of the US led equity bull market is now under way as both Asia and Europe equity outperform the US YTD. Important segments of the US equity market, the Qs, the S&P itself, the Mag 7, have all broken under their 200dmav support levels which is an uncomfortable place to be. 

While US equity weakness manifests, non-US equity markets have continued to move up, clearing what were 200d resistance levels and breaking out above long held resistance areas, including some going back to the 2010-12 period and others back to the GFC. ACWX, EFA and EEM have all broken above those important technical levels and held them for the most part during these past few topsy turvy weeks. Clear relative strength.

It’s a beautiful thing – what were once ugly charts have turned pretty and once pretty charts have turned ugly. Its called rotation and its happening on a global scale. Make Global Macro Great Again! Yeah!

Investors need to embrace the big shifts that are occurring right in front of us. For global macro investors this is opportunity time. We want to sell US rips and buy non-US dips. Any non-US equity pullbacks are healthy given the rip they have enjoyed – they should be bought.

What about in FI and FX land? Things have been hectic here too – the globalization of the UST bond bear market has travelled alongside the equity globalization process. They are two sides of the same coin. Much as US equities rocked for the past several years while USTs suffered their worst bear markets since the 1950s, we expect a similar shift to bond bear markets in Europe, Japan and China as Govts step up fiscal stimulus in a major, major fashion.

Bunds have had their worst sell off in years while the Euro rallies hard, JGB rates stand at their highest level in decades while the yen strengthens and Chinese long duration debt has reversed its big rally much as we had been expecting it too. The latter move confirms China’s success in beating back deflation, a critical factor for our China equity bull case.

Why have these bond markets all sold off as one, even as the UST market was rallying? Investors are pricing in the new reality that the fiscal stimulus game has moved out of the US & into the ROW. The US shot its fiscal bullet post Covid and it led to the exceptional growth advantage enjoyed by the US these past few years, which boosted earnings, sucked in foreign capital and ramped the USD. All that is now unwinding.

The US no longer has any fiscal space while Europe (Germany) and Asia (China) do, a point we have made at length. Lack of US fiscal space explains Trump’s domestic economic focus, from tariffs – he needs money to reduce the deficit and provide more room for tax cuts, to DOGE – its raison d’etre is to cut spending and create fiscal space for a bigger tax cut. Watch what Trump does, not what he says.

Now the fiscal spend is occurring in Germany, in Europe, in China, in Japan. Its just beginning in Germany which has grasped the nettle of economic, military and geopolitical underperformance to step back onto the European and global stage in a major way. Germany is moving at speed and with scale that will redraw the European and global map across economics & security. This speed and scale sweeps away confusion & provides clarity, allowing markets to rapidly price in this new world.

The same holds true in China where this week’s NPC meeting has made clear China will boost its stimulus by running a budget deficit of 4% of GDP, the highest in many years while making consumption job one thereby reducing exposure to domestic deflation risk & Trump trade threats.

As we have noted previously, the action outside the US is driven both by domestic risks (German stagnation, China deflation) and Trump tactics (throwing Ukraine under the bus, adding more and more tariffs to China’s US exports). All of it combined to make clear to anyone paying attention that the global investment opportunity set has shifted away from the US, the leader for the past 15 + years and back to the ROW.

The ROW is cheap, under owned, has fiscal space, political will and a clear rationale why it needs to move and move in size and with speed. This clarity is what is driving markets. Investors have suddenly realized their non-US UWs have left them badly offsides.

What’s less clear is what will happen in the US – there uncertainty rises, over tariffs, over the size of Govt, over the Trump Admin’s willingness to force a slowdown if not recession to provide the space necessary to reorder the economy as it sees fit. 

CEOs hate uncertainty, small businesses hate uncertainty, households hate uncertainty, investors most definitely hate uncertainty. Thus, weak economic survey & sentiment data is leading to US financial asset weakness. 

Who likes uncertainty – Trump, because it plays to his ego, makes it all about him, everyone wants to be his friend, to kiss the ring. What amazes me is how poorly this works out – for everyone, every time. Now it’s the whole country’s turn. Who has entered the Trump orbit and been propelled higher? The only one to note is Musk and we will see how long that lasts.

Market wise, we believe the USD will be the big loser as capital repatriation becomes the next big story. Keep in mind dollar weakness is what Trump wants. He is a RE guy – he wants low rates and cheap financing. The USD (DXY) has broken important technical levels in what is likely to herald a period of secular dollar weakness.

Much as the Mag 7 is likely to leak investor interest simply because it is massively over owned and investors need to rebalance back into China tech, the same holds true for the USD. All these non US assets are historically cheap; the first move has been fast and furious as is usually the case. Pullbacks are likely & should be welcomed because the direction is clear.

We are at the very beginnings of a secular change in global equity leadership from the US to the ROW. It’s corollary is the globalization of the UST bond bear market to Europe, Japan, China etc. driven by Govt spending to compete in the three main areas of AI, Climate & Defense across the TPW’s three main regions: Europe, Asia and the Americas. This spending will support global growth and the global equity bull market thru earnings.

USD weakness will serve as a tailwind for non-US assets as rate differentials shrink, Japanese inflation continues, Chinese deflation fades, Germany’s economy starts to grow again and Europe finally bulks up and plays like a big dog.

Enjoy this BTV Balance of Power show clip from Tuesday – we made the point that the balance of power IS shifting.https://x.com/BloombergTV/status/1897061714165735712