Inflection Point

1150 words, a 4 minute read.

Recently, I was conversing with our new intern about how global macro requires one to be able to see BOTH the forest and the trees. I have also written at some length about how I have found technical analysis (TA) to be very valuable over the past 18 months. 

It struck me recently that my fundamental approach, starting with our proprietary Tri Polar World (TPW) framework, extending into our Global Risk Nexus (GRN) process and on to model portfolio construction and execution, allows me to see the forest. Concurrently, TA allows me to assess the health of each individual tree (holding) in our global multi asset and 100% global thematic models. Thus, truly seeing BOTH the forest & the trees; a cool insight (at least for me).

I start here because several technical guys I like to follow – John Kolovos at MRA and JC Parets at All Star Charts – both recently used terms very similar to “Approaching The Turn”, the title of last week’s Monthly.

In fact, I cribbed today’s title from John’s morning report where he suggested a cross asset market “inflection point” was upon us while last night JC noted the improving breadth (# of stocks above their 50dmav) in key US cyclical and value sectors &  suggested that “the seeds are now planted for a potential trend reversal”; one that could kick off the next leg of this equity bull market. 

Today’s big Jobs # could represent the fundamental catalyst needed to kick off the technical shift both John and JC note. John thinks bonds will tell the tale and highlights the 1.31% level on the 10 yr. UST as key. My own work highlights that AGG is threatening to break below its 200D support at $115.95 while IGOV just got rejected at its 200D resistance at $53.58. 

All this foots with my POV – a POV reinforced by my own TA as I examined every single holding in both Models as part of my monthly Model Portfolio Delivery Service (MPDS). What was most striking was how virtually every holding, whether US Value or EU banks or Water, EV or fintech thematic, ALL bottomed on July 19th, amidst the Delta variant panic.

This suggests to me that there was widespread deleveraging and position cleansing on that day which is likely to mark the peak of the Delta variant scare. So notwithstanding the scary headlines and news flashes and Govt action the forward looking discounting machine that is the global equity market has already discounted Delta. I believe its also discounted the China takedown risk given that the few holdings that didn’t bottom on 7/19 were China related & bottomed on 8/3 which is likely to be the peak of the China scare.

One thing I don’t think risk assets have discounted is what comes next – namely no big post Delta Covid variant to scare us further, the shift from staggered reopening to global synchronized expansion and the continuation of very strong EPS growth – forget Q2 y/y, focus on the 78% of reporting companies, the highest US % in a decade, who increased their forward estimates. European EPS is also very strong, led by Cyclicals and opening a historically wide gap between their earnings power & stock prices.

“Poor seasonality” is the main reason why most equity investors fear the August – Sept period but what if poor seasonality goes the way of another oldie but goodie “Sell in May and Go Away” – how’s that one working so far this year? The ahistorical nature of the current times suggest these cliches are very narrow reeds to rest a market POV on.

The Delta variant is now more of an upside cap than a downside risk – a cap that should ease as the FDA gives full approval to Pfizer’s vaccine, as China gives 17mspd, as 70% of European adults have already had at least one jab and as Delta fears accelerate vaccinations. Along similar lines, the feared Fed Taper has been broadcast from every rooftop in every city in every country - announced next month, begun in Q1 2022 & extending thru the year.

Focus on things like Pres Biden calling for 50% of new US car sales to be EV by 2030 and reflect on the fact that currently that number is 2-3%. Focus on the likely Senate passage this weekend of track one of the Biden Infrastructure plan. Thematics constitute roughly 25% of our global Multi Asset Model while Climate itself represents over 25% of our TPW 20, 100% thematic global model.

As I wrote to clients earlier this week, sometimes investing requires patience and that has been the case the past few months for those like TPWA & its clients positioned for Cyclical- Value and non US equity to lead. The good news is that these sectors have spent much of the past several months digesting their big gains from the start of the year and are now poised to make the next up move. Thus we made only a few minor changes in our global multi asset model portfolio this month.

I continue to prefer non US equity to the US and note that European equity continues to set new highs while the EU’s Joint Recovery Fund (JRF) has started to make disbursements out of its nearly $1T fund. These disbursements to member countries will continue for the next several years providing support to an accelerating European economic recovery.

I expect to see the same in Japan and note that Japan remains the only major DM with its Composite PMI under 50 – that should change soon as vaccinations surge, consumer confidence recovers and lockdowns are lifted. At the moment, foreign investors are buying zero yielding JGBs hand over fist while ignoring a technically compelling equity market.

StoneX just updated their monthly country ranking and guess what? Japan just exited the bottom three, replaced by…. the US. Latin America retains all three top spots. Speaking of LatAm, Brazil’s CB just raised rates 100bp to 5.25% as Covid eases, growth recovers and inflation fears grow. Inflation fighting credentials are key for Brazilian CB credibility. Expect more hikes.

For my weekly Crypto comment I gotta say I really liked SEC head Gensler’s comments on how he is neutral on the tech but not on investor protection… Crypto assets have been in major rally mode - more regulation & investor protection = institutional adoption and higher prices. We own it; we like it. 

Inflection point indeed; the pain trade is higher risk assets, especially Cyclical/Value and non US equity. 

I am excited to be making my first ever appearance at the Money Show’s Virtual Expo this  Wednesday the 11th at noon. Please use this LINK  to sign up. My talk will be on Thematic ETF Investing: The Global Macro Opportunity Set. See you there!