What a Difference a Week Makes

980 words – a 4 minute read.

Remember last week? You know, the S&P’s worst week in 4 months, the week the FOMC messed with everyone, the bond market got agita, the $ rocked and Commodities imploded?

You do – good – well now you can forget it. Because THIS week we had new ATHs in S&P & Nasdaq, Fed speak got back on FAIT track, the 10 yr. UST didn’t move and Commodities snapped back to life like my hydrangeas after I water them. 

Cross asset positioning is cleaner, sentiment is better and the VIX is back under 17. Dare I say “pothole”?

Last week I worried about others worrying about dot plots; I worried about how a Fed policy mistake could make my Bear Case more likely. This week, I forgot about the dot plots (useless) and thought about Joe Biden as a transformational President. If history does indeed grant him that moniker it will be in large part be because of his ability to work the levers of Govt as befitting a guy with 40 + yrs. of experience.

The infrastructure plan is brilliant – he gets to show bipartisanship, Republicans get to show they helped bring a new road, better bridge, faster Amtrak to their supporters, Biden shows Govt can work for people and most importantly for one JP, he reduces the Bear Case risk.

Because one has to acknowledge that China growth has peaked, that US growth is peaking  (PMIs, Housing), that liquidity is peaking (MS rollover) the ECRI is forecasting a US Growth Rate Cycle slowdown, that fiscal stimulus is waning etc. etc. A slowdown is coming – but a slowdown from 7% GDP growth to 3-4% is just fine.

Biden also sets up the dual track to ensure he gets what his Party and its supporters want – a new deal for human capital development as its now being called… we do need to develop better humans so we can leverage AI so I guess the wording works. This big ticket program will be passed along straight Party lines via reconciliation. 

Now much still needs to be done – neither track is a straight shot – the House is in session for 9 days between now and post Labor Day, Senate for 16 (doing the peoples work doesn’t seem to mean working during the DC summer) but if both get done the chances of the Democrats maintaining control in the mid-terms goes up, the likelihood of a sharp US growth slowdown goes down and we can continue on our merry way.

That merry way remains a global tour here at TPWA as a staggered reopening gives way to a synchronized global economic expansion (IHS Markit notes global GDP gets back to pre-Covid peak this Q & begins expansion in 2H with Q/Q global GDP growth going from 2% in Q1 21 to 6-7% Q/Q growth in 2H 21).

Note that we are in year one of this expansion – over the past 50 yrs., G7 expansions have  averaged a 5 yr. lifespan, which together with the Climate focus, underpins my Commodity super cycle call.

On the equity front, I expect the laggards to become leaders and remain focused on Latin America in EM and Japan in DM equity. Latin America leads the way – I know you don’t hear that often but yes - leads the way -  in inoculating itself against a Fed policy mistake as Mexico joins Brazil in raising rates – guess what -  their FX rose and so did their equities. A surging CA surplus underpins Brazil’s Real rally under 5 to the USD on its way to 4.5 or below. This week was actually the 1st in 4 months that EMFX rose every day… $ strength is soooo last week.

Flat ytd, Japanese equity is a true laggard (after rising over 20% in late 2020) but the Japanese narrative is changing in real time – gone are the vaccination woes, replaced by 1M shots pd, the tough lockdowns are now being eased, the Olympic worries are soon to be replaced by TV shots of sun lit track and field events as the world’s best take the stage. Japan is also the last major economy with its Composite PMI under 50 – the EU equity rally this yr. taught us to buy that sub 50 and ride it up.

The good things about Japanese equity haven’t so much as changed as gotten better: Japan is cheap - now it’s even cheaper at a 70% P/BV discount to the US, Japan is under owned – absolutely – show me the folks that are OW Japan equity, Japan is cyclical – yes Industrials make up 22% of EWJ. Yen weakness is the cherry on top of strong EPS growth – Corporates have penciled in 106 Y/$ for the FYE vs current 111 (htip the old Firm Morgan Stanley).

What about inflation you say? Well we got another US PCE data point this morning and it was slightly BTE. Going forward inflation should slow as bottlenecks ease, supply increases and price works its magic – just look at lumber. I remain in the transitory camp.

What about Value? Well the US banks passing the stress tests with ease suggest return of capital is up next and its likely to be significant…. European banks are likely to have the same development in the months ahead. 

Two historical data points to contemplate while pool side this weekend: since 1928 there have been 20 times when the S&P was up 13% thru late June – in 19 times it was higher at YE; over the past 70 years the AVERAGE time between S&P corrections is 134 days, a milestone we hit this week.

Enjoy these two clips: a deep dive on last week’s cross action correction via Ohmresearch and last night’s BTV clip covering US infra, Japan, Lat Am equity and an emphatic affirmation of the Commodity super cycle!

TGIF!