Lessons Learned
1600 words + a 10 minute BTV video, worth the time.
It’s been a week. From the US elections & risk asset reactions to China’s NPC meet and Germany’s coalition implosion, there has been a lot going on. Suffice to say its one of those periods where there are lessons to be learned.
We had the opportunity to guest host Bloomberg’s Election Night Special coverage for the 11 pm to midnight hour & as the clock ticked on and the results trickled in, we were asked to stay on till 1 am which the other guest and I agreed to do. Two hours of live TV is a lot especially when the view one started off the evening with is clearly not unfolding.
As such we made our mea culpa around 12:50 am, noting that our long and strongly held view of a Democratic landslide was wrong. Admitting being wrong on a big call is never easy though I have some experience doing so as a Morgan Stanley sell side strategist back in the day.
So, Lesson one is to step up when wrong and admit it, even on national tv. Its tough to separate the personal and professional especially in discussing politics but that’s what being a professional is all about – Lesson two.
Lesson three is the value of being on TV & being forced to recalibrate one’s POV in real time, under the bright lights and relentless gaze of the camera.
Tuesday night also provided me the opportunity to join a call with Duke Football’s Defensive Coordinator Coach Jonathan Patke. As regular readers know I draw a lot of lines from sports and especially college and pro football to markets and investing. In his first year at Duke, Coach Patke leads a Top 20 defense. He spoke to our group about his philosophy of playing fast, with an edge, about teaching what is a complex Defense to the other team’s offense but is simple for the Duke kids so they can play fast & loose.
Being on TV, in a big time environment & dealing w adversity in real time, one’s gotta play fast & loose. Global macro investing is the most complexity one can face as an investor – key is keeping it simple and having a process.
Lesson four comes from the old adage - would you rather be right or make $? It took me a while to even understand the Q & then more time to figure out the answer. I was trained at Morgan Stanley under what many think was the best global macro team at the time - Biggs, Wien, Roach… MS strategy was all about making big calls & being right.
Yet for the last 20 yrs I’ve been on my own, managing my own capital, providing portfolio strategy & asset allocation advice & now providing model delivery in which the majority of my own capital is invested.
So as Tuesday turned into Wednesday and I made my way back to BTV for a Wednesday pre market segment with a mere 7 hours separating the two appearances I knew it was going to be an interesting day given how the election had been called for Trump & how futures markets were trading up materially
We noted on air how we were wrong on the political call (good thing I don’t make a living as a political prognosticator) but were likely to do well and make a lot of money given our positioning.
How much $? Well, our flagship Global Multi Asset (GMA) model portfolio had one of its best days in a while on an absolute basis and especially on a relative basis beating its BM by over 140 bp on the day.
As we dug into the discussion with the BTV anchors led by Jon Ferro, we discussed the concept that good economics proved to be bad politics for the Harris campaign given the Biden Harris Admin had generated the best performing major economy on the planet. The campaign got V little credit for it as what became evident in hindsight as a global wave of post Covid frustration led to incumbents losing around the globe.
The Trump campaign on the other hand ran on a economic policy mix that was pretty universally panned as bad for inflation, rates, deficits etc. and yet it turned out to be good politics as the shift to Republicans was quite clear with Trump becoming the 1st Republican candidate to win the popular vote in 20 years.
The result was an evaporation of contested election fears as the VIX volatility gauge had its biggest one day fall in almost 20 years setting off the big equity market moves that continued through the week. The UST MOVE index likewise fell sharply from roughly 135 to 105 by Friday as deficit worries ebbed for the moment.
What’s our approach now? We continue to believe the key to our Long Cycle thesis is continuity, in economics, policy and politics to provide market continuity via the earnings channel. We await to see if the Republicans win a trifecta to assess the political and most likely policy discontinuity generated by the incoming Trump Admin. We will have much more to say in our upcoming Monthly next week.
From a Tri Polar World perspective, the competition between the three regions; Asia, led by China, the Americas led by the US and Europe will continue to depend on which region can best marry the public private partnerships necessary to succeed in the new industrial policy mix across the main spheres of competition: AI, Climate and Conflict.
The collapse of the German coalition Govt just reinforces that it is global competition and sitting stuck in neutral as Germany hads been is not a viable strategy. Things are moving too fast. We see the US at risk here as well given the likely discontinuity a Trump policy mix implies.
From a tactical POV we want to enjoy the bounce - VIX has collapsed, De riskers need to re risk (how else does one get 5% moves in one day), seasonality for stocks is the best of the year, technical are supportive and as noted earnings continue to shine with Q3 up double pre season estimates at 8% vs 4%.
This week is one of those times which helps to explain how roughly 90% of active managers underperform their BM. If one is holding cash, then one is behind the BM. It sets up what could be a real performance chasse into YE given there are only 6-7 weeks left till the books are closed.
Strategically, we remain fully invested and OW global equities and deeply UW global bonds with a zero weight in UST (big factor explaining our relative outperformance vs BM). We remain OW Commodities as well which should do well if we are setting up for a global growth competition.
One thought we have is to approach the outlook as a simple one – the US is expensive, over owned and faces policy discontinuity with limited room for repricing higher given US equity valuations & rising rates. Earnings growth tends to drive year 3 bull market returns and here its the benefits of potential tax cuts (very dependent on Rep sweep) vs the negative effects of tariffs (JPM estimates roughly 40-50% of 2025 Y/Y EPS growth at risk if 60% tariffs are applied to all Chinese imports into the US).
The dollar may hold the key. Foreign ownership of US financial assets are at an ATH. While markets have repriced the USD higher over the past 6 weeks or so its worth noting that DXY is flat over the past week of trading, even with a sharp rise in US long rates. The Mexican peso, a key EM currency, is up roughly 2% this week vs the USD.
Should the US hothouse effect have limited duration – in part because of the bond vigilantes - the USD could weaken as foreigners take their US profits & deploy capital back into their own cheaper, much under owned domestic markets, such as China where the policy mix is improving.
In essence, the US represents an expensive and over owned asset that could be flipped into a cheap, under owned asset with policy mix improvement such as in China or perhaps even Europe which is seen off the bat as the big loser to a Trump win.
The Fed continues to cut and China continues to add support to its economy – announcing today the rollout of roughly $1.5T to offset local Govt financing issues. We expect the Trump victory coupled with China’s realization that the president has wide powers on the trade front vs the tax front for example suggests Pres Xi and China’s leadership will likewise respond fast and thus push further into stimulating domestic consumption.
A potential US economy hothouse effect as an economy running well above potential growth enjoys Fed rate cuts and likely Trump efforts to further stimulate things coupled with China looking at its economy through a national security lens implying further support of domestic demand suggests good things ahead for commodities.
We remain invested across our models in the Crypto space and note that fintech has been a big OP in the thematic space over the week while renewables has slumped hard; no real surprise given Trump’s antipathy towards the climate, wind and solar. We continue to Buy the Laggards.
Enjoy the clip from Wednesday’s BTV appearance - a mere 7 hours after I walked off the set a little after 1:00 Am the night before. Jon starts us off with a softball….https://www.youtube.com/watch?v=Scy9uoHpKtA