It's Elementary

1623 words – a 4 minute read.

We had the pleasure of being on BTV’s Surveillance show Tuesday morning. It was a fun interview as the anchors gave me props & a victory lap for my China KWEB call (now vastly OPing US tech). Please see the link below.

We made the point then and reiterate it here in our title that sometimes in the investing world it really is simple. We believe this is one of those times where the factors moving global cross asset markets are simple and it’s best to not overthink things. One can think of the KISS philosophy (keep it simple stupid) or as we note in today’s title its elementary, my dear Watson.

Elementary in this case means the 4 pillars of a global synchronized rate cutting cycle (BofA notes last month’s 26 rate cuts were the 4th most in a month ever), China stepping up to the plate and firing multiple policy cannons (buy to the sound of cannons can mean the metaphorical kind as well). The global economy is in good shape, no major imbalances anywhere & corporate earnings and margins remain robust with Dr Ed Yardeni making the case that 7-8% US EPS growth ( the historical average) can take SPY to 8k by decades end.

So yes, one can worry about dock strikes, job losses or fictional consumer struggles ((personal bankruptcies close to 50 yr. US low) if one wants but here at TPW Advisory we want to keep it simple. We believe the global macro blue sky outlook we have posited for several quarters is fast coming into view and we want to stay bullish on risk assets.

We wrote Buy The Laggards several weeks ago and noted China tech and Commodities as two of the laggards we liked the most. They both are in fact the laggards of the laggards in terms of relative performance over the last several years. BofA has a great chart showing EM equity at a 55 yr. relative low to US equity. Another great chart shows that China equity is close to its lowest ever weight in ACWI.

We took a look at the charts earlier today and noted that KWEB has smashed through its 50, 100 and 200 dmav, reclaiming the high ground it had ceded earlier this year. That’s important not only because it suggests this move is for real but also because KWEB and China equity in general were one of the few areas below those important technical levels when we reviewed our two model portfolios a few weeks ago.

Commodities are in the same boat. BofA (their latest report this week was one of their best in a while) showed a great YTD flow chart of inflows/outflow for certain assets. The picture is wild: Equities and bonds have seen inflows of roughly $475B ytd; commodities on the other hand have seen whopping $20B or 4% of what equities & bonds have taken in. 

Talk about the laggard of laggards. We looked at the GSG chart as well (the commodity BM  for our Global Multi Asset GMA model) and it too has broken back above the key technical lines. Like China tech it was one of the few areas below all three levels a few weeks back. This suggests that not only has the fundamental story gotten better but the technical picture has also improved, providing further support to our view that it is a boom, boom time.

We also note how equities did quite well in the 2nd H of September – a historically poor period for equity returns, suggesting once again that the underlying strength we have noted in this equity bull market demands respect and give it respect we do. As we wrote several weeks ago, its rotation not recession – tech was one of the worst sectors in Q3 and yet ACWI and SPY hit new ATHs. 

Recent US economic data revisions, current data like the Citi Economic surprise index popping back into positive territory, today’s jobs number coupled with revisions all suggest the US economy is fine. GS just raised its Q3 GDP estimate to 3.2%. 

We always like third party validation. Here is Blackrock CEO Larry Fink: “There is enough capital in the private sector that we will be able to fund these new projects and so to me this is the dawning of the new reality that we’re going to see broadening of public and private investment in infrastructure,” he said.

Given the sharp backup in long UST rates we remind folks that its not the speed nor scale of the Fed rate cuts that matter; what matters is whether the Fed is cutting into recession or not. Clearly it is not and just as clearly that is V positive for future US equity returns. We remain zero weighted in UST.

At the same time one has European equity hitting ATHs even as the economy stagnates as the (forward looking) market bets on more ECB rate cuts to underpin the fully employed European consumer. Lower inflation sooner than expected (sub 2%in Europe) was our global macro surprise #1; it’s playing out on both sides of the Atlantic. We are watching to see if Europe picks up the Draghi baton and decides to compete with China and the US as the Tri Polar World’s (TPW) battle lines get ever more clearly drawn.

We are believers that China’s leadership, up to and including Pres. Xi, has made the decision to move forward aggressively to support its economy. This is VG news for China, its consumers and those who sell to its consumers (EU, EM, Etc.). We will have more to say on this in next week’s Monthly but to us this is elementary – don’t fight the Fed, don’t fight the PBOC.

John Kolovos at MRA Advisors notes that Chinese equity is acting like US equity at the GFC low. He also believes that EM equity is setting up for a “ Generational” opportunity. Now technicians are not the most effusive folks around – that’s more the strategist type (guilty) so when one hears generational opportunity from a technician one should pay attention. 

John notes: “I reiterate, that EM is in the early stages of a generational bull market, is a massive coiled spring just waiting to be sprung, and is building for a move well beyond all-time highs.EMFX is close to breaking out of a 14 yr. range which shld provide huge tailwind to EM eq.”

Here’s more John: “The initial playbook is to buy momentum laggards with high beta, which is the classic momentum factor crash that occurs at bear market bottoms. In the case of China, that means Tech over Financials, Semis over Software, and Insurance over Banks.” We remain long KWEB in both model portfolios.

Likewise, we are believers in the AI revolution and the opportunity set in the pick & shovel semi space. It’s also becoming ever more clear that the power requirements AI generates extends that opportunity set into the commodity space. Here is Nvidia’s CEO: "It's impossible" to win the AI race without nuclear. Nuclear power’s revival is significant, global and happening (as so much of this is) in real time. 

Here's some VG trading color from GS Prime brokerage: ”Semis and China under-owned

- Tech: Semis positioning is much cleaner vs earlier this year and tech long exposure as a whole is ~5-year low on our book (US TMT long/short ratio now stands at 1.94, still near 5-year lows in the 2nd percentile). US TMT makes up 28.1% of Overall US Net Exposure, in the 7th percentile vs. the past year and in the 11th percentile vs the past five years.

- China: Reminder this past Tuesday (Sep 24th) Chinese equities on our Prime Book collectively saw the largest 1-day $ net buying since Mar ’21 (second largest in the past 10 years). China Gross and Net allocations are still low and now in the 7th and 14th percentiles on a 5-year lookback, respectively.”

The real time nature of things is something investors need to grapple with. Its all about speed as we have written about for several years. It also means making mistakes can be fatal. We believe in our Global Risk Nexus (GRN) system which suggests to us the melding of economic, political and policy continuity on a Tri Polar World (TPW) basis. Coupled with that melding is the unique scope and scale of upside to be found in many areas of the global cross asset space, areas that have been neglected in the  decade plus rush to own US assets. This combo leads to our global blue sky outlook for 2023-2027. We are focused on the laggards not the leaders.

Enjoy Tuesday’s BTV clip. I come on around the 1 hr. 39 minute mark – Jon Ferro’s intro of me is funny. Quick backstory: I was picked up for the ride to the studio and noticed the car had Dartmouth and Columbia stickers on it. I asked the driver if he had kids there and he said yes all three of his children had gone to the two schools.  An African, he went on to say “only in America”. I asked him where he was from and he said Nigeria. We chatted and I told him I really liked the Nigerian musician Fela Kuti. He laughed and said Fela was one of his favorites. I mentioned Sorrow, Tears and Blood as a favorite Fela tune. We were running a few minutes late so he said don’t worry I will get you there and turns on Sorrow, Tears and Blood… Check it out. I walked into the studio, too late for makeup or hair but stepping lively… only in NYC baby, only in NYC! https://www.bloomberg.com/news/videos/2024-10-01/bloomberg-surveillance-10-01-2024?sref=ftskAWJe

Go Duke, looking to go 6-0 tomorrow night!