The Trickster Market

1910 words –  take 5 minutes in a nice cool, air conditioned spot to read!

It’s a bit of a weird time in the markets – maybe it’s the early summer heat wave or the thrill of watching Nvidia go up day after day (well except for the last week – down over 9%) or maybe its just that the speed of change has gotten everyone a little twisted. When the WSJ employs terms like stock market bubble (Nvidia) and sleepy stock market (VIX at 5 yr. lows) within days of each other one’s got to wonder.

The word trickster has been in my head the past few days so I looked it up – here’s the Wikipedia definition: In mythology and the study of folklore and religion, a trickster is a character in a story (god, goddess, spirit, human or anthropomorphisation) who exhibits a great degree of intellect or secret knowledge and uses it to play tricks or otherwise disobey normal rules and defy conventional behavior.

Hyde describes the trickster as a "boundary-crosser".[1] The trickster crosses and often breaks both physical and societal rules: Tricksters "violate principles of social and natural order, playfully disrupting normal life and then re-establishing it on a new basis."[2] Often, this bending or breaking of rules takes the form of tricks or thievery. The trickster in most native traditions is essential to creation, to birth.[7]

It turns out that many cultures have their own distinct version of a trickster so perhaps Wall St and the global financial markets are in process of developing their own. After all: great degree of intellect (market knows all), disobey normal rules (post Covid world), disrupting normal life and then reestablishing it (AI Age). The last two notes: taking the form of tricks or thievery and essential to creation, resonate deeply – how often has the market tricked us into losing lots of money or in the antithesis how often how we developed new investment ideas, created new portfolios and winning positions?

In today’s WSJ’s piece on Nvidia & its smashing success as a stock the author references Dickens and his Tale of Two Cities work. The current environment does seem to have some of that feel about it. The US consumer vibe cession, the notion that we are in a stock market bubble, that the market is due for a crash, that’s its only a matter of time vs Nvidia dominance, Amazon trading at cheapest forward PE in a decade, three of four defensive sectors trading at new relative lows vs SPY, multiple markets around the world at new highs.

It seems like we have switched from the long standing recession obsession to a Big Tech doom watch with more references to bad breadth than one can remember. We admit it is frustrating to see many positions not fully participate in the glorious tech run up. Yet, the sting is assuaged by being involved in that very tech success as we have been in size with our digital pick & shovel US semi thesis, our physical shovel play with the miners as well as  globally via our EU equity growth position and our 2 tech stack divide thesis with its China tech focus.

While there may well be some trickery afoot we don’t think it is in the tech stack. We are full believers in the AI Age and expect it to be a major force of change throughout the globe both public and private, corporate and individual. We disagree with the idea that the current moment is akin to 2000 (we were involved in the markets as a global strategist at Morgan Stanley then and believe me, the current tech environment rests on much more robust and secure footing – except for those that don’t step up to meet the AI moment – those folks are toast).

The FT seems a bit more measured noting in a piece today that the AI business boost is broadening out with more and more parts of the tech stack benefitting from it. This makes sense as one of the major differences between now and 2000 is that the tech stack is already built out – AI sits on top of it – & thus it can spread much much faster than the step by step build out of the Internet back in the day.

We want to Listen to Stoxx not Vox & are believers in trend over breadth as an equity market indicator. We view the global equity uptrend as a strong one, well underpinned by most importantly rising earnings growth, plentiful liquidity, decent sentiment (lots of folks screaming bubble tends to be a good bubble antidote) and improving technicals. It reminds us of last October when the SPY sliced thru its 200dmav support causing lots of folks to sell before it reversed – it hasn’t looked back since – trickster market.

The last point is interesting – many point out how few stocks are participating in the run up – this is true - but they fail to note that this means many segments of the markets like US industrials (as JC at All Star Charts points out) are firmly in robust uptrends and have simply pulled back to support levels – the benefit of looking back more than a few months. We believe many segments of the market are now poised to resume uptrends just as we approach the Q2 earnings season (Atlanta Fed Q2 GDP Nowcast at 3%) which should be supportive for equities.

The same holds true for many offshore equity markets. Here the issue has not been missing out on tech runs but rather getting blindsided by political concerns, be it in Mexico, India, S Africa or France. Abrupt pullbacks in FX and equities led to a quick loss of wealth – back to our trickster market - good YTD performance reversed in a matter of days.

Ok, so does that mean we should have sold, should sell now, hold or buy more? Of course, it depends on each situation but it is worth noting that the Mexican peso for example has clawed back much of its weakness (broke 19 to the USD post election, now at 18.3 and back in line with pre election levels). Arguably the peso was too strong, having been among the world’s best performing currencies vs the $ over the past 18 months. We remain long Mexican equities as one of the Tri Polar World winners (ST RSI of 24).

What about France? Macron’s decision to call a snap election set off a firestorm of press headlines signaling all sorts of sound and fury. One alert to tricksters (anyone know what the French trickster is), would ask does it signify anything else? Like a radical change in Govt (no, Macron will stay and remain in charge of foreign & defense policy) or major changes in economic policy (unlikely as France is already in trouble for its large budget deficit – of course the far right and left both have huge spending plans – the kind those unlikely to see office wield as cudgels against those in the real world). 

So yes the French OATS to Bunds spread widened out to 80 bps – we note the peak over last 15-20 years was double that. French 10 yr. OATS now yield 3.2%, a full 100 bps below that of UST. OATS auctions this week went off fine – with 2.4x BTC. There is no sign of broader EU contagion – 10 yr. Italian bonds spread to Bunds, the usual EU wide risk barometer, is roughly 150 bps, slightly wider than pre election but far far from the Greek bank crisis days when it blew out to 300 bps. That’s the key point to us – unlike prior EU crises - there is no risk to the EU itself.

One needs to stay alert for the famed media trickster. Bloomberg headlines post flash EU PMIs this morning were all about weakness and worries over French elections leading to pullbacks. One would never know unless one read the piece (as we did) that the EU Composite PMI remains above 50 for the 4th straight month, the dividing line between expansion & contraction. Yes, above it, not slicing through it into contractionary territory.

Full employment, rising real incomes, ECB rate cuts, stable FX, recovering China all suggest the EU is going to be just fine. We note EAFE equities are off roughly 4.5% over the past month – coming off new record highs – seems like a healthy pullback. We remain long EU banks which got pummeled (off 7% past one month – from record high) and now sell for .5x TBV with ST RSI of 26.

Closer to home, we have the upcoming first presidential debate between Pres. Biden & former President and now convicted felon, Donald Trump. One of our buddies asked us what worried us most since we have been and remain quite positive in our short & long term outlook.

We answered the return of Trump to office. Not just because of the near unspeakable things he is likely to do in his retribution campaign, or his plans to deport millions even when it is clear that a rising labor force has been and will remain a major factor in BTE US economic growth, not even his rabid resistance to climate mitigation. No, not for those reasons alone.

It’s also for his economic program which can be summed up as tax cuts for the wealthy, tariff hikes for the poor & a weaker $ for all. All of which, as some are finally starting to point out, (here’s looking at you Larry Summers) would likely be both inflationary and stagflationary – classic Trump – a political trickster if there ever was one. 

We are positioned for a weak dollar via OWs in both EM equity and Commodities but even so we find Trump’s economic plans to be a potential disaster with a possible crash landing for a very overbought USD (Apollo notes Q1 foreign capital inflows rose 61% Y/Y). Thus, we look forward to the debate where some of this will presumably be surfaced. We also expect Trump to be completely outplayed by Pres. Biden, a performance that we expect will lead to further polling gains for the president.

The media trickster can barely bring itself to note that Pres. Biden is now leading in virtually all of the most recent national polls, as folks start to tune into the race post Trump’s conviction. Biden leads among those most likely to vote and our expectation is that as folks pay more attention Biden’s polling numbers will go up and our long standing thesis – that Biden will win in a landslide – will come to fruition. We expect that landslide win could include a Democrat sweep which would allow for a continuation of the Biden policy mix that has led to significant post Covid US economic growth outperformance vs the ROW.

That’s not in most folks’ bingo cards but it could be the trick that helps sustain the current global equity uptrend, reinforce the double digit EPS forecast for the US, EU and China for 2024, 2025 and for the US 2026, which in turn will underpin sustained equity performance as rotation allows leaders to rest and rested foot soldiers to lead.

Ok – much as we want to stay in the air conditioned office and not venture into sweltering NYC with temps in the low 90s its time to enjoy the weekend.

Stay cool out there!