Humdrum is Underrated

1302 words – a 3.5 minute read.

Thanks to Bloomberg for using humdrum in a story regarding Chair Powell’s Humphrey Hawkins testimony. It caught my eye for a couple of reason; one, it’s a neat word that one doesn’t see very often (meaning: dull, monotonous, lacking in variety or excitement) and two it fits perfectly with our return to stability thesis – aka macro surprise #3 in our 4 for 24 macro surprises.

When the Fed Chair testifies for two days and it’s a nothing burger that’s a good thing. When the ECB head speaks following its regular meeting and markets yawn, that’s a good thing too. It reinforces what we wrote several weeks ago in Handoff regarding how markets have transitioned from rate dependency to a focus on economic and earnings growth.

All this is exactly what should be happening at this point and is confirmed by the VIX at 13 and the MOVE index at 105. Yet investors, still shell shocked following years of macro uncertainty and volatility, continue to look over their shoulder, wondering what’s going to bite them in the butt next. We have been and remain much more sanguine about the outlook focused as we are on macro surprise #4, our early cycle thesis.

Amidst the humdrum nature of the week there was still plenty to note such as both Chair Powell & ECB head Lagarde confirmed that rates would be cut this year. Both seem to be lining June up as the likely start of a gradual rate cutting process. This EM led, global rate cutting cycle reinforces our positive, multi year, blue sky outlook as do continued global liquidity & back to back, double digit US EPS gains and stock buyback years in 2024 & 2025. Goldman expects US stock buybacks to total over $1T next year. This reinforces the cyclical breakouts popping up all over the US equity market (if one can get beyond the Mag 7 blather).

In Japan, one notes higher than expected February inflation readings coupled with a growing sense that the Shunto wage negotiations could catalyze the BOJ into action. Bloomberg reports that Japan’s largest union federation (Rengo) has demanded its strongest wage demands since 1993, seeking gains of roughly 6% vs 4.5% a year ago. Preliminary results could come just before the BOJ meets later this month, suggesting the BOJ could exit NIRP this month while preparing to end its YCC policy as well. Consensus is for the BOJ to move in July; record short Yen positions remain in place, look out!

China is in the midst of its “Two Sessions” Work Conference and the early read out suggests a continuation of the 5% growth path trod last year. Consumer confidence remains the weak link reflected in weak CPI readings, the housing market and overall domestic demand. No policy bazookas were presented which implies some level of Govt confidence that the current small bore policy process is sufficient to address economic concerns.  Investors of course, are not so sure.

In a nod to our recent Tri Polar World (TPW) framework update, we noted Bloomberg’s story on China’s Tech Fund stepping up to raise roughly $27B for its third fund to support the development of China’s semiconductor industry. This type of investment reinforces tech as a driver to the the Tri Polar World as each region has to be a player in this space, investing heavily, driving growth and helping to stabilize each region & the global economy.

We also noted the Fed’s Flow of Funds report which showed some staggering numbers with US assets climbing to roughly $177T or 8x liabilities of roughly $20T – by far the widest A/L spread recorded. Concurrently, we noted the Business Roundtable’s quarterly CEO sentiment indicator finally broke back above its historical average for the first time in over two years. Put these two together and one gets rising confidence, tremendous wealth creation, rising cap ex and stock buyback plans.

We also liked this from MS: Flashback Friday: In the 309 trading days after Netscape (NSCP) released in December of ’94, the Nasdaq rose ~46%. In the 309 trading days after ChatGPT was first released, the Nasdaq was also up ~46% – if 1994-95 is the real barometer, then we might have a pretty good couple of years ahead of us. We agree.

As our process dictates we spent this week reviewing our two models, our flagship Global Multi Asset model (GMA) and our thematic TPW 20 model. A good part of that work includes running technical charts on all our holdings, potential holdings, BMs and other vehicles of interest. It’s a really useful exercise and is somewhat right brain, left brain after the prior week’s deep dive monthly (March ran to 6700 words, 31 charts & tables from 22 different research sources).

Chart takeaways include the broadening out of the equity moves – from tech to multiple sectors in the US & from the US to the ROW with ACWX outperforming the S&P over the past month while EMXC has performed in line with EAFE for the past 1 & 3 months. We note US small caps are outperforming both SPY and QQQs over the past month.

From a thematic perspective, we noted how our TPW 20 model showed some real strength with over a dozen holdings outperforming the Qs over the latest period. Obviously BTC was a monster as basic supply – demand kicked in once the nine spot BTC ETFs launched roughly 2 months ago. We look forward to the halving next month. Bio tech also has been a strong source of performance as well, as AI potential extends into the science space while an M&A cycle kicks off.

Form an upside POV two areas stood out, China and Climate. Take KWEB for example – it represents China tech, a mission critical sector as noted above yet KWEB at roughly $25 could double to $50 and then double again to $100 before hitting its 2021 high of $101. In contrast ACWI is pressing against its 2021 high while ACWX remains roughly 12% below.

Climate continues to be overly represented in the laggard group within the TPW 20 ranging from carbon to uranium, solar to wind. Climate has been one of the tougher investment spaces the past few years and thus is primed to benefit from a period of relative calm and an extended runway.

One area that might not be so calm going forward could be the USD. As the Fed prepares to cut rates and the ROW starts to pick up (we note recent German and Chinese export data were both BTE) while the BOJ exits NIRP the potential grows for a significant USD rollover, perhaps catalyzed by the BOJ given those Yen shorts. We think its quite likely the USD has already peaked for the year (DXY).

Dollar weakness could in turn serve as a catalyst for flows to pick up into both EM and Commodity assets. We remain OW both and while EM has yet to really move, Commodities are among the world’s best performing asset class YTD, up 6% or so (GSG – energy heavy) together with ACWI while AGG trails, down 1%. Within the Commodity space we note gold’s breakout & are growing more excited about copper miners as COPX breaks above its 200D resistance level. We can envision an environment where existing copper supply concerns meet recognition of a recovering global economy & spark a price spike that could be similar to what we saw in URNM around the turn of the year – a 25% up move in 4-5 weeks.

So you see, even in a humdrum environment there are things for the active, global macro & thematic investor to learn and employ. Those are the things that keep us busy here at TPW Advisory.