Traction

1297 words – a 3 minute read.

Hi everyone, happy to be back in the saddle after an excellent 2 weeks on the beach, literally. Fire island, a barrier island off the coast of Long Island NY, is the perfect antidote to the NYC hustle.

One of the best things about Fire island is that one has to take a ferry to get there – the ferry has always been the separation point for me – once on the boat the mainland stuff falls away and it’s a new world.

That sense, that quick sink into a new reality struck me once again as I got on the outbound ferry back to reality – how quickly the vacation vibe hit – the traction it gained right away. That sense of traction has stuck with me as I worked through a mountain of emails this week and prepped for a BTV hit yesterday morning with the Surveillance crew. What follows is lifted from those TV prep notes.

The mid August pullback seen in risk assets was healthy in that it quickly shifted an overbought market to an oversold one with the NAAIM exposure level index experiencing its sharpest 4 week drop since March 2020 while the Put – Call ratio broke above 1.0 for the first time since March. The pullback never gained the traction necessary to become anything more worrisome and as such reinforced the upward bias for risk.

We remain focused on the transition from inflation – recession – Fed worries to the traction necessary for global economic growth built on the back of a manufacturing recovery stimulated by an inventory restocking process coupled with a global cap ex boom to deal with our 3 Cs of Covid, Climate & Conflict. This week’s US Q2 GDP revision supports the thesis as Axios reports the bulk of the revision was due to companies “burning through inventories rather than boosting production” – guess what comes next?

Arguably, forward looking financial markets are already suggesting the growth recovery is gaining traction with equities far outperforming other asset classes YTD while Commodities break out and bonds struggle. Certainly not what one would expect if the globe were going into recession.

Company results tell a similar story. Q2 earnings came in much BTE with 79% of the S&P beating estimates. More importantly, analysts have been busy revising up forward earnings estimates and 2024 now has a 12% EPS growth handle to it. Going forward, earnings are key given we have already enjoyed the multiple expansion phase (in the US – ROW V cheap indeed).

Inflation is losing traction as the data remains supportive of our Middle Path – the one that got laughed at a year ago – the path between high inflation and deep recession. Jackson Hole was a nothing burger and the focus on the Fed becomes less important as we shift to a fiscal policy driven framework. Rates are much more reasonable, policy is restrictive and the August jobs report has soft landing written all over it according to Moody’s Mark Zandi. 3M average job gains now roughly 150k, the smallest in two years.

Our focus shifts now to fiscal policy & the public/private partnership visible in the New Industrial policy in the US, Europe’s fiscal efforts to compete on the clean energy/EV space and China’s multi policy effort to boost its economic activity levels.

I was asked on BTV about China and noted my one word for it is: traction – when will the drips and drabs of policy action gain traction & lift the economy? We expect that traction in the 2H and into 2024; Marc Chandler notes that the combined impact of the multiple, small bore policies advanced to date could be = to 1% of GDP. Our focus remains on the property market & the consumer which are linked together. https://twitter.com/bsurveillance/status/1697222697791410661

I raised the famed Economist Cover contra indicator and noted that the magazine doubled down with back to back negative China covers over the past month while reminding anchor Jon Ferro of how the lights went out on my last BTV appearance when I noted we were adding to China equity!

A couple of other points to note on China – the PBOC is adding liquidity to the markets, tech company earnings and e commerce results have been excellent, Macau tourist visits are up as are car sales. None of which is supportive of the China consumer hiding under a rock thesis so popular in western press or the idea that Pres. Xi is too much of a socialist to want the economy to grow.

China experts Trivuim points out “The (partial) return of economic policymaking power to the State Council from the Party will make policymaking more pragmatic and less ideological.

Get smart: This marks another sign that Xi Jinping is delegating some power in his third term. That reduces the risk that he becomes a bottleneck for policymaking at a time when Beijing needs economic solutions fast.”

In addition, relative valuation vs US equity is at a 20 year low while all major Chinese equity markets remain well above their October 2022 lows & close to their 200 dmav with KWEB back above its 200dmav. Foreign selling of equities this month (August) is likely to be a record at over $11B.

China’s August Composite PMI just came in ABOVE 50 at 51.3 while Manuf came in at 49.7, BTE. Reading the explosion of negative Chinese stories (most negative since 2015 low) one would never imagine the Composite PMI is above 50 & thus signaling expansion. Meanwhile, Commodities are breaking out – the opposite of what one would expect if China’s economy was truly imploding.

Another interesting example of traction is the Ukraine military offensive which most reports note as slow or bogged down or disappointing. The counter to this argument is that Ukraine has advanced to within a few miles of being able to bring Russia’s key Crimean transport routes within range of its advanced weaponry. This suggests that Russia will soon be forced to decide what to do about its Crimean based forces and population. Traction, once gained, impacts things quickly.

As the global economy gains traction, we expect continued solid performance from the Commodity space. We note Europe’s prelimary August Manuf PMI showed its first uptick since January while China’s PMI data showed growth in new orders. We continue to expect the US ISM Manuf to break above 50 before YE & note today’s August report came in at 48, marking 30 months since its peak vs the average peak to trough of 17 months.

Within Commodities, Oil continues to lead with WTI going out at a YTD high this week supported by continued OPEC supply restrictions coupled with growing demand in both Asia and the Americas. Vortexa notes a current global crude oil supply shortfall of roughly 5mbpd, the biggest deficit this year.

As the global economy gains traction, we remain of the view that opportunity exists in the Commodity space across both energy (we added in our latest model portfolio update) and EM equity and debt (also added). We expect USD weakness into YE and 2024 which should provide support to EM assets as a new EM led rate cutting cycle gets underway, providing further support to the global economy.

The summer is over, its Labor Day weekend & the start of Fall. September seasonality is not great but remember pre election seasonal weakness is usually a buying opportunity - BTD.

It’s also the start of college football season. The Surveillance crew surprised me and brought up my Duke football playing days – enjoy this clip & check out my prediction that Duke will kick off its season Monday night on ESPN natl TV vs #9 Clemson with the upset W! https://www.youtube.com/watch?v=UelAucLH36I&t=3584s

GO DEVILS!