Glide Path

1540 words – a 4 minute read.

Fintwit has been awash this week with soft landing stories & how the growing # of such means all the good news is in the price suggesting the nascent risk asset rally is already on its last legs. The reality is that soft landing stories peaked back in August according to Bloomberg and if one wants to reflect on headlines and what it means for markets lets reflect for a minute on the recession call that predominated throughout the 1st H of this year while stocks marched steadily higher. That would suggest that we could have months and months of soft landing stories ahead - how would markets react is the question.

We don’t want to be left out here at TPW Advisory & so we throw our hat in the headline ring with today’s Musings titled “Glide Path.” It ties together a number of our recent thoughts and builds on our 2024 outlook with its macro surprises including lower inflation sooner than expected (already working) and impending macro stability (thus glide path).

We had the pleasure of being  on BTV’s Surveillance show this morning; as usual these Musings come direct from my prep notes for the hit. Mohamed El Erian was a guest anchor & his new book, Permacrisis, was highlighted. We have written previously about how we find this thesis somewhat tired – remember Polycrisis last summer?

 In his favor he did note that there is hope for a productivity boom ahead – a thesis our readers will be familiar with -  but the book’s emphasis is on the ever growing # of crises and how Govts of various stripes in multiple places are not up to task. Now since Mohamed comes from the UK one can understand that frustration but its more UK specific (Brexit anyone) than global in our opinion.

Our more optimistic view foresees an era of Big Govt ahead to deal with the 3 Cs of Covid, Climate and Conflict that necessitates a policy shift from monetary to fiscal & leads to a supply chain realignment led acceleration of regional integration across the Tri Polar World’s 3 main regions. It incorporates our global cap ex led boom thesis akin to the US cap ex boom of 1995-1999.

This morning’s BTV chat covered two areas - the risk asset outlook into YE & our 2024 outlook. We remain very constructive on the outlook into YE and described the near perfect set up for a continuation of the rally which ignited last week on the back of soft inflation #s.

We see 4 main supports for risk on: seasonality, sentiment, positioning and the technical picture, all of which we described in last week’s Musings. We also discussed the 5 stages of the rally: hedge funds cover, hedge funds go long, CTAs flip from short to long as they chase the new trend, underperforming institutions, long cash and UW equity, facing the calendar year end, start to chase while retail comes along to join the party.

All seems to be playing out according to plan: Goldman’s prime brokerage folks report hedge funds increased their short stock positions for 14 consecutive weeks (thru 11/10), the longest such streak on record. State St reports that institutional investor positioning at end October was very risk adverse while Bloomberg reports US retail sold more equity in October than any month in the past two years.

As we prepped, we noted several things of interest. One is continued Big Tech leadership, something we alluded to when we updated our models and added Big Tech exposure several weeks ago. We also noted that SMH, semiconductors, hit a new ATH this week (note that bell cow NVDA reports 11/21). Furthermore we observed that when one zooms out on the tech charts one notes that with perhaps the exception of NVDA the bulk of Big Tech, including the Magnificent 7, are flat to up/down 5% or so over the past two years. This is true of the S&P, ACWI etc.

The other interesting thing we learned from checking the charts is that the rest of the world has really benefitted from this recent rally & while lagging the US both ACWX & EEM have broken back above their 200 d resistance level. We see it in our models; EM equity and tech populate our Global Multi Asset (GMA) model’s top performers list. We added to our EM equity exposure several weeks ago as well & note that BofA’s most recent FMS noted short China equity as #2 most crowded trade.

Here is Pictet: “EM-DM gap remains very wide – in fact the widest since Covid & GFC , which more often than not has been accompanied by an outperformance of emerging stock markets.” We are now significantly OW both EM debt & equity in our GMA model with equity exposure spread across our Tri Polar World of Asia, Europe and the Americas.

It’s increasingly our view that the recession and bear market was a 2022 event, that stocks have essentially gone sideways for 24 months, that risk assets have absorbed & digested a lot of bad news & are now sniffing out better days ahead. Dr. Ed Yardeni came out this week with a whopper of a 12 M S&P forecast, calling for 5400 by YE 2024 – we are with him directionally at least.

The second part of our BTV interview touched on our 2024 outlook with a focus on our 4 macro surprises: lower than expected inflation sooner than expected (Fed dots predict 2% in 2026 – could see a 2% handle in 2024); sustained productivity pick up as full employment, AI and Covid best practices combine to sustain productivity gains; the advent of macro stability – something risk asset indicators are already sniffing out (VIX under 15 , MOVE under 120) while Taiwanese coalition building & the meeting between Pres. Biden & Xi tamp down geopolitical risk & finally the conclusion to the late vs early cycle debate (here is where semis hitting new ATHs come into play). We would also note the new 52 week high in A$/Yen rate, a traditional global growth cycle indicator. We remain in the early cycle camp and note that folks coming this way will lead to risk asset inflows & higher prices.

We didn’t have a chance to lay out our formula of: lower inflation > lower rates > weaker USD = rising risk asset prices, especially ROW. We note DXY breaking down to 104 while the 10 yr. UST threatens to break under 4.4% and the 2 yr. under 4.8%. Last month’s call that the next move for UST rates would be to rally 50 bps – met with disbelief at the time - has come to pass. UST now are knocking on key technical levels (4.3-4.2% on the 10 yr.) that could suggest rate tops are in. To that effect, LPL notes: “According to the latest Commodity Futures Trading Commission (CFTC) data shown below, leveraged funds (typically hedge funds and other speculative asset managers) reported near-record net short positions in 10-year U.S. Treasuries.”

Here's the take from Pantheon: "Slower consumer demand, reduced housing rents, lower profit margins, easing wage growth and restrictive monetary policy represent the ideal disinflationary combo heading into 2024.” We would add declining used car prices (record 18% decline), record easing in NY Fed’s Global Supply Chain pressure index and falling gas prices at the pump to the list.

Our former MS colleague and FX expert Stephen Jen just sent round a piece laying out how the BOJ could well intervene on the way down and noted he sees $/Y FV in the 110s (149 today – that’s a 20% move lower). Conor Sen, one of our favorite Bloomberg columnists, is out today with a piece discussing how the Fed could well make some insurance cuts early in 2024 as inflation falls faster than expected – bang in line with our POV. Such action would lead the Fed to switch from risk asset enemy to frenemy as rate cuts would sustain the positive economic and market outlook, setting up that glide path we led with.

As we discussed two months ago, we expect macro stability to come with a massive reward, what we called at the time a $1T unlock . Well, as time passes the reward gets bigger right? In this case yes as that reward money has risen to roughly $1.6T in retail inflows this year to US money market funds (MMFs). Total US MMF assets now equate to $5.7 Trillion. Now that’s a lot of money – some of which will no doubt find its way into risk assets should the scenario laid out above unfolds.

Today’s hit was at 7 am which meant heading to the office in the dark & arriving just as the first light of day started to brighten the NYC landscape. I thought to myself what a beautiful day – its Friday, next week is Thanksgiving (no Musings) and we have much to be thankful for, including what we expect to be the end of several years of macro volatility, a return to stability and a new term to contemplate amongst the various landing scenarios… the TPW glide path.