"I’m from the Government and I’m here to help”

Today’s Musings come straight from my notes for this morning's BTV’s The Open hit with my buddy Jon Ferro. At 1025 words, it’s a 4 min read.

A new political era has dawned in the US as Pres. Joe Biden takes office. Investors seem enamored as the S&P had its best Inaugural Day in over 80 years. Biden’s to-do list is hauntingly long, starting with the need to reverse the Trump Admin’s raison d’etre: “the deconstruction of the administrative state”; judging from the cascading policy failures of the past few years it came very close to achieving its objective.

Biden plans to counter this with a whole of Govt approach beginning with a hiring spree that, according to his Chief of Staff, will have more folks on the job Day 1 than the 1st Obama Admin had on Day 100. A series of Executive orders have highlighted the immediate focus: Covid, the economy, climate and immigration.

The Biden Admin has great potential to achieve much more than many think. Biden, a moderate, excels at finding the center of his Party; a center which has moved leftward & become more progressive. Cheap capital, huge needs, a low bar & a more progressive Govt suggests a potential regime shift. A regime shift that could reverse a 40 yr Republican led drive to dismiss and diminish Govt. This trend began with Ronald Reagan and his famous line: “The nine most terrifying words in the English language are I’m from the Government and I’m here to help”.

Today, however millions of Americans are looking for just that Govt help and guess what: when they get it, they spend it. BofA credit card analysis shows those receiving stimulus checks have increased spending 13% y/y vs a 3% bump for those who didn't receive stimulus. Activist Govt is both good economics AND good politics.

Activist Govt is not just a US opportunity either - all three regions of the Tri Polar World face similar challenges & have activist Govts including the EC leadership in Europe and Pres. Xi in China. Which region best captures this regime shift and most benefits its people will have the leading edge as we work our way through the 2020s.

On the Health front, Pres. Biden’s goal of 100 M doses in his first 100 Days might not be aggressive enough (current 7 day av is 800k). 2M pd gets US to herd immunity by summer. US cases/hospitalizations are rolling over though the race is on between more contagious variants and vaccinations. A win here sets the stage for success on the climate & economic policy fronts. Biden’s American Rescue Plan is up next & will provide color on the potential for bipartisan governance.

European leaders are under growing pressure to do better & have targeted vaccinating 70% of their population by summer. A stumbling vaccination process is worrisome. EU lockdowns have clearly had an effect on mobility indicators & service data but Europe’s production side is doing just fine and should continue to benefit from Asia’s return to growth. Today’s PMIs were actually BTE and suggest Europe has learned how to function in lockdown.

China, leveraging its position as 1st in Covid and 1st out, is shifting from “mask diplomacy” to “vaccine diplomacy” in an effort to reframe the Covid discussion away from its Chinese origins. This is a role the US used to play and arguably should still play at least in its own hemisphere.

China’s return to growth has been well flagged but Asia’s trade growth is what's really impressive. Taiwan’s Dec exports (X) rose almost 40% y/y, Japan X rose y/y for the 1st time in over 2 yrs while S Korean X over 1st 20 days of 2021 rose 10% y/y. The global shortage of semiconductor chips suggests this should continue through much of 2021. Japan is a big winner from rising Chinese demand, as is Germany… Europe & Japan are cyclical stock markets - thus my continued enthusiasm for them.

Activist Govts leading to policy driven markets setting the stage for thematic opportunity sets remains THE principal investing backdrop. The passing of the leadership baton from growth to value over the past 3 months has led to significant non US equity market outperformance together with strong Cyclical/Value OP vs Growth. This was partly driven by a rise in thematics (climate, cyber, fintech/crypto etc) together with a very healthy & stealthy US big cap tech correction.

Given the Covid backdrop, it's no surprise that we now have a mini handoff back to Tech while the overheated climate/clean energy, crypto spaces cool off. Broad market advances, both country and sector, allow for these mini rotations which resolve overbought & extended positions by time not price. This in turn, suggests continued upside over the course of the year led by non US DM mkts, Cyclical/Value & Thematics as Tech Kryptonite (rising rates, vaccinations) manifests. If the US leads the vaccination process can it retake global equity leadership? I don't think so given heavy tech weight that will be negatively affected by that very vaccination outperformance.

Commodities in a bull market, UST in a bear market. Crypto was run by retail in 2020 - institutions will drive 2021. Continue to expect the occasional pothole which when driving at Covid speed can feel scary but ensures one doesn't go too, too fast.

NT earnings season should be supportive - a record # of S&P companies have raised their guidance. The bar is low with consensus Q4 EPS down 10% y/y in the US and down 25% y/y in Europe. The mini rotations and baton passes are opportunities to ensure one’s portfolios are properly positioned after a scorching few months.

TPW Advisory’s fast start continues with two events next week: a true Tri Polar World webinar with our friends at Gate Advisory in Geneva and RedGate AM in Shanghai - Monday at 7 am EST - don't worry, there will be replay. https://us02web.zoom.us/webinar/register/6816109896726/WN_FgpyeVEhStiAsIQE1Ghsjw