TGIF?

1630 words – a 5 minute Super Bowl Commercial read.

Usually, TGIF is said or typed or written as a call to action – hey the weekend is here – lets party or lets get ready for that fencing tournament or lets just chill. More recently it has been accompanied in financial markets with a bit of concern as the last two weekends set up back to back Monday selloffs, two weeks ago it was the DeepSeek selloff and then last weekend set us up for Monday’s Trump tariff selloff.

One wonders what the Oval has up its sleeve for this weekend – troops in the streets, invading Mexico, Panama, Greenland or any number of tiny states the US now feels comfortable bullying. As part of our Stoic strategy we want to imagine all scenarios so as to be surprised by none.  (More on this in next week’s  Monthly) 

Here at TPW Advisory we don’t want the week to end… we want to keep enjoying the significant outperformance of Europe with EZU up 8% YTD, of Commodities with Dr Copper up 3% today, reinforcing that Commodity breakout we have written and spoken about at length the past month.

Most significantly, we want that China tech rally to keep on rolling with FXI up 9% and the big dog, KWEB, up 12% YTD  vs SPY and Qs both up 3%. Yes, YTD Chinese equity is outperforming US equity by 3 and 4x.

We wrote about much of this in our Friday Musings titled Polar Opposites and before that in our Monthly titled American Exceptionalism At Risk. We spoke about it earlier this week on Yahoo Finance (see clip below) where I noted that nothing signifies American exceptionalism like US tech and how DeepSeek has shot a hole right through the heart of that thesis.

Many, including us, first focused on what DeepSeek meant from a cost angle or chip angle, reading up on the Jevon Paradox and other stuff. The real deal, the real impact is that it has shocked the investment community out of its easy button strategy of just adding to the Mag 7 and its all good – TGIF baby!

The much bigger story, the one we have been telling for years, is that in the Tri Polar World (TPW) Age of competition across the three regions of Asia, Europe & the Americas in the three critical segments of AI, Climate and Defense, China is rapidly becoming a player. We saw it first in the Climate space – a space we consider so important that we made it one of the 5 areas in our Global Risk Nexus (GRN) work that has underpinned every monthly deep dive for the past 3 years: Climate, Economics, Politics, Policy & Markets. To survive in global macro land one has to have a framework (our TPW), a structure (our GRN) and a process (we write every week).

China’s embrace of the new industrial policy mix of public & private sector cooperation together with fiscal and monetary policy integration resulted in it now dominating the entire global clean energy complex.

DeepSeek informs us that China is going to be an AI player. That it is not sleeping on AI and notwithstanding Splinternet and the US efforts to wall off its tech space and tech leadership from China and vice versa China recognizes the existential nature of the AI competition. 

Our point as we went overweight China last year and added to it a few months back and pushed the KWEB story is that for all the love shown to the Mag 7, there is a huge opportunity to buy China tech at a fraction of the cost of the Mag 7 (discounts of anywhere from 30-50% depending on the valuation measure).

Now keep in mind that just as the US has walled off its tech space from China the Chinese are doing the same – check out Tesla sales, Apple sales etc. in China. China tech is for Chinese companies and global investors if one wants. We want.

Have to admit a smile crossed my face when I looked at Bloomberg this morning and saw the headline “China tech enters bull market”. It’s unusual to be fully positioned as things start to go off – at least for us. It’s happening now and so you can have your TGIF… we want the week to just keep rolling on.

Back to what might happen over the weekend. Who knows what Trump or his Cabinet members  might say. Sadly, one has to acknowledge that our President is a habitual liar, he seemingly can’t help himself. The good news for investors is that to be forewarned is to be forearmed. We know this and therefore don’t have to pay any attention whatsoever to what he says.  Instead, we want to pay attention to what he does.

This also holds true for his Cabinet who know they cannot state something different from what Trump says & thus they too have to twist themselves in knots, reverse themselves from what they have said for years and years, flip positions well staked out to keep the boss happy. Examples abound; Sec of State Rubio and his newfound desire to eliminate USAID after years and years of supporting it as an essential element of US soft power. Or Treasury Sec Bessent saying that the UST issuance policy is perfect and will be maintained after spending the last few years arguing that it was mistaken and dangerous. What changed?

We also want to pay attention not to the news but to the market reaction to the news. As we have noted previously the market is smarter than us here at TPW Advisory, smarter than those reading this Musings, smarter than anyone of us and so we want to follow the smartest take.

What is the market telling us? It is noting that global growth is fine as evidenced by the broadening breakout in the commodity space which we measure though GSG. Here’s StoneX on flows into the Commodity space: “Broad-market commodity ETFs saw significant inflows of nearly $400 million month-over-month and $107.8 million over the past 12 months.” A $100M net inflow into Commodity ETFs – ALL of them – over the past YEAR! Early days folks, very, very, very early days.

GSG’s breakout suggests our key global Long Cycle thesis, the title of our 2025 outlook piece, is intact. This in turn suggests that the global equity bull market is also intact and likely to broaden out supported by earnings growth broadening out as 2025 and 2026 progress.

We expect a better policy mix in Europe, especially Germany post elections and China, post Trump tariff imposition, to support growth. Both Germany and China have among the most fiscal space to expand Govt support for investment in Germany to offset its stagnation and greater consumption in China to stave off deflation.

With the GSG breakout supporting our global growth outlook we now focus on the non US equity space, looking for it to break out above important technical resistance levels and confirm our expectation of a geographical expansion of the global bull market. We expect that expansion to result in non US equity leadership in 2025 and beyond. 

Fido’s macro team states: “It’s interesting that EM equities are now negatively correlated to the S&P 500 (on a 12-month basis). That puts the MSCI EM index in rare company alongside T-Bills, gold, commodities, and some alts.” A look at the charts tells us we are very close across ACWX, EFA and EEM to break outs; breakouts we expect in the coming days, weeks & months.

We continue to see the USD a key linchpin in all this and are watching for USD weakness to provide a significant tailwind to Commodities and EM equity OP. We have questioned and continue to question the utility of the Trump Admin pissing off neighbors and more importantly funders for what appear to be cheap political takes. We believe capital repatriation out of the US back to Japan, Taiwan, China, Europe will be a huge story in the coming months, quarters and years.

The US is the world’s largest debtor, its net foreign asset (NFA) deficit has exploded over the past decade or so as our former MS colleague Stephen Jen recently laid out. He notes: “There is a huge deficit for the US, i.e., foreigners own USD25 trillion (around 85 percent of US GDP) more US assets than Americans own foreign assets.  This is a historical high, having risen sharply from only 20 percent of GDP in 2012.  We believe the US real economy is significantly out of balance.  This exceptional configuration of strong capital inflows and persistent external imbalances is unsustainable and likely, at some point, result in a correction in US asset prices and a cessation of massive capital inflows.”

We agree with Stephen and think the time is coming fast. The US financial markets as we have noted time and again have been the only game in town for 15 + years, outperforming all led by its tech dominance and more recently its fiscal expansion leading to the best DM growth post Covid.

Today we have Trumpian chaos in the US and an improving policy picture outside the US. We have a priced for perfection US financial asset space from USD to UST to US equities at a time when the exceptionalism of all 3 are being called into question. The rest of the world is cheap, massively cheap, record breaking cheap, priced to go cheap. Sell High, Buy Low was how we learned it.

What a world – why do we have to have weekends? Oh yes, for the Super Bowl – something the US is still strong in – TV sports – fly Eagles, fly Saquon.

Enjoy this 7 minute Clip from Wednesday. https://www.youtube.com/watch?v=wWOcKWOYAKE&t=8s