I Need More Cowbell

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1959 words – a lot to cover - 6 minute read by the fire.

We continue to leverage our Stoic investment strategy to deal with the whirlwind/wrecking ball that is Trump 2.0. That wrecking ball shifted from domestic to foreign policy last weekend as the US team completely upended the Munich Security Conference, a long standing event where NATO members gather to discuss threats to their common safety. 

This meeting hit differently as VP Vance and Def Sec Hegseth made it clear to the Europeans that the US was done providing security for Europe, that the threats as Vance stated were not from the Russian invasion of Ukraine but rather from woke policies within. If that were not enough Sec of State Rubio met with the Russians to discuss Ukraine’s fate without European or Ukrainian participation. Trump followed this up as only he can with a presser where he got the start of the conflict completely wrong (Trump accused Ukraine of starting it) and finished it off by calling Ukrainian leader Zelensky a “dictator”.

In essence Trump just upended some 80 years of security and defense arrangements between the US and Europe as represented by NATO, the North Atlantic Treaty Organization. Now its fair to ask why spend so much time on this foreign policy stuff; after all, we are not writing for Foreign Affairs but for global investors.

We write about this turn of events, not because its shocking though it is, but because it’s a real time illustratration of how Trump accelerates our Tri Polar World process. Here, by actively driving European integration. Importantly, it also kicks off the third round of our TPW spending competition, as Defense spending takes the stage. 

Blowing up NATO sets the stage for a big spend on European Defense. This follows China’s spend on Climate, the Biden led US follow up spend & the US led AI spend followed by China & DeepSeek. Now, courtesy of the Trumpian wrecking ball, we expect a massive European spend on Defense as Europe finally faces the reality that Trump doesn’t give a hoot about them & shares more of a world view with Putin than with any EU leader.

Bloomberg reports the German response: “Germany’s vice chancellor, Robert Habeck, told broadcaster RTL on Thursday. “What Donald Trump is doing there is treason. You can’t call it anything else.” We note German elections this Sunday – we expect the CDU/CSU to lead and an easing of the debt brake to follow as Germany leverages its fiscal space.

Trump has always sympathized with Russia, exactly why remains a mystery but sympathize he does. One need only go back to his first term and his meeting with Putin in Helsinki where Trump backed Putin’s version of events over those of his own national security and intelligence apparatus. 

To see how far we have come in the intervening 8 years one only need note that today Trump’s Director of National Intelligence is Tulsi Gabbard, another Russian sympathizer who followed up Trump’s calling Zelensky a dictator with her own video clip parroting standard Kremlin misinformation. Thus, the circle has been squared – Trump no longer has to worry about disagreeing with his own US intelligence agencies on Russia given that it appears the Russian line now goes direct from the Kremlin to the WH.

The European reaction brought us our title, borrowed of course from the classic Christopher Walken SNL skit featuring the famous line: “I need more cowbell”. https://www.youtube.com/watch?v=cVsQLlk-T0s 

European leaders, from EC head Ursula von der Leyen to former ECB head Mario Draghi, are crying out for more spending on Defense, more spending to arm Ukraine, more integration, more joint borrowing. In essence more dependence on itself and less on the US. 

Europe needs to stop saying no and start saying yes to a more integrated and unified Europe across financial, economic and security parameters. It needs to step up in the Tri Polar World of regional competition between Aisa, led by China, the Americas, led by the US and Europe. It’s a potentially transformational opportunity to never let a crisis go to waste. We believe 2025 and beyond will be more about what Europe does than what America says.

The numbers are staggering; Bloomberg estimates European defense needs coupled with Ukrainian reconstruction costs could total over $3T in the next decade. European leaders have floated a $700B fund for Ukrainian arms to replace US support if as is likely Zelensky refuses the “treaty” agreed to by the US & Russia without European or Ukrainian input.

These spending needs have led Europe to activate its fiscal escape clause, thereby allowing for much greater Defense spending across the region. One result of this TPW spending competition is that long rates are heading higher across much of the DM. Whether one looks at German Bunds, Japanese JGBs or UST its pretty much the same picture. 10 yr JGB yields for example have tightened roughly 40 bps vs UST over the past month & are now back to levels (1.44%) last seen 15 years ago.

The FT reports: “Germany’s 10-year bond yield has reached 2.5 per cent, from just above 2 per cent at the start of December. Its spread over 2-year yields has reached close to 0.4 percentage points, the biggest gap since late 2022. Anticipation of growing defence spending has piled on top of speculation in markets that the country will reform its constitutional “debt brake” and increase borrowing to back a fiscal stimulus package, following elections on Sunday.”

Put simply, much as the US equity bull market is globalizing so too is the US bond bear market. Fintwit notes that: “the % of ACWI markets above their 50-day and 200-day averages surges higher.- best in roughly 6 Ms.” MS notes that: “European stocks have enjoyed the 2nd-best beginning of the year ever, and the best start to the year vs the US since 2000.” Finally, Carson notes that equity bull markets that make it to year three, like the current one, tend to run: “Going back 50 years, the 5 bulls that made it this far lasted an avg of 8 years”.

This DM ex US yield backup feeds into our USD weakness thesis as the yield premium gained by investing in UST vs foreign bonds withers away, opening up the door for capital repatriation – our main focus currently. Given that JGB yield narrowing, it’s no surprise that dollar/yen just broken 150 after being as high as 160 last summer.  

We note Japan’s recent strong GDP, inflation and Composite PMI data & suspect dollar yen will be for the FX market what FXI has been for the global equity market – monster outperformance that no one realizes until its well under way. To wit, FXI is up over 50% during the past year vs SPY up roughly 25% - its literally a double and no one has paid any attention until the past few weeks.

Another meeting we paid attention to this week was that between President Xi and numerous China tech entrepreneurs including Jack Ma & DeepSeek’s founder. These are highly managed events; the last such event was held in 2018. Krane notes that its purpose was “to boost private sector sentiment” which  suggests the rift between the Govt and China Big tech is over. Sinocism quotes Xi as saying: “it is the right time for private enterprises and private entrepreneurs to fully display their talents.” 

We note that both FXI and KWEB are now closing in on their October 2024 spike highs. We strongly believe this move has got real legs given that the move so far has been led by regional Asian managers as Bloomberg reports: “An analysis of Bloomberg data on regional allocations by some of the largest active Asian equity funds shows most are reducing exposure to Indian equities and adding Chinese stocks in recent months. The MSCI China Index is on track to outperform its Indian counterpart for a third-straight month, the longest such streak in two years. The valuation differential adds to China’s allure as well. The MSCI China Index is trading at just 11 times forward earnings estimates, compared with about 21 times for the MSCI India Index”.

Speaking of China, we note that one of the last pieces of our global investment outlook puzzle has fallen into place with the Chinese 10 yr bond yield backing up sharply, signaling that the deflation threat has been arrested. Bloomberg: “The yield on China’s benchmark 10-year bond rose to 1.73% on Tuesday, the highest since December, while also marking its fifth straight session of advances. The one-year yield climbed eight basis points to 1.5%, a six-month high”. 

As we wrote in our Monthly – watch the market reaction to the news, not the news itself. China’s bond reversal joins the YE Commodity breakout, the more recent  breakout of non US equity & the global bond market reversal discussed above as signposts along our investment path. Next up capital repatriation and USD weakness. Our buddy Chase over at Pinecone Macro noted this tidbit: “Japan resident net investment in foreign stocks off to worst start since 2015, net sale of over $1B USD.” Starts with a trickle, ends in a flood.

Our outlook continues to manifest in real time across the Tri Polar World, confirming our global growth long cycle thesis, our global equity bull market thesis and the hand off from US equity leadership to ROW. As US rate differentials narrow & the USD rolls over we expect this chain of events to provide the commodity and EM equity bull markets with a nice tailwind. 

The lineup is as follows: the US and ACWI have led and continue to generate new ATHs while Europe has just done the same led by its banks. We have long been and remain OW EUFN. Pulling up the rear and providing lots of upside to come is EM equity together with much of the thematic space.  In the EM equity space China leads; in the thematic space numerous future tech and innovation ETFs have broken above their 200DR levels led by ARKF, BUG, ESPO & others - many of whom remain a whopping 50% or more below ATHs.

Sticking to our process amongst all the noise we held our monthly model portfolio review session earlier this week. We reviewed the technical positions of all the holdings in our two models, the Global Multi Asset (GMA) and TPW 20 thematic model, together with all the BMs and potential adds & noted what we described above playing out in the charts. 

One example is how few of our holdings are below all three key moving averages, the 50, 100 and 200dmav. Amongst the 30 or so holdings in our GMA model for example only two were below all three moving averages; a month or two ago it would have been a quarter to a half of the model. No bad breadth here. Several months ago over half the TPW 20 was under these levels, yesterday it was only five positions. 

After several months where we made very few changes we upgraded both models this month, focusing less on the theme and more on the instrument (the specific ETF) to express our viewpoint. We exited our technical weak sisters and added positions to express both European rearmament and USD weakness. We agree with MS who notes that: “our strategists see continued upside for European defense stocks given the structural need for European rearmament. We think 3% of GDP defence spending could be achievable for NATO Europe by 2030, implying a 50% uplift to topline budgets.”

Enjoy this Reuters piece published earlier this week: https://www.reuters.com/markets/what-stoicism-can-teach-investors-about-handling-trump-pelosky-2025-02-20/