What A Start

1415 words – a 4 minute read by the fire.

And no we are not talking about the start of President Trump’s 2nd term but rather all the action taking place here at TPW Advisory.  What a week; beginning with last Friday’s publication of our Monthly: American Exceptionalism At Risk and moving to Monday’s hour long podcast with the Macro Hive folks (see below) on to Wednesday’s Reuters piece submission (out next week) then to yesterday’s model update reports to clients and culminating in this morning’s 8 am guest host slot on BTV’s Surveillance show.  We have been putting in the work!

When you put in the work its nice to get the reward and we are feeling pretty good about the start to the year. From model portfolio performance to the number of folks signing up to our weekly Musings it feels like we are on a bit of a roil. Now, we have been around the game long enough to know this is when the giant sledgehammer comes out of nowhere and knocks us flat. So caveat emptor.

We have had a pretty clear investment point of view since we wrote our 2025 Long Cycle Outlook last October with its focus on the dual engines of a long global growth cycle and a global equity bull market supported in part by the earnings generated by that growth cycle.

This growth cycle is underpinned by the Tri Polar World (TPW) competition between Asia, Europe & the Americas in the three existential areas of AI, Climate and Defense. As we noted last week, this competition is very expensive and requires a full house effort including fiscal & monetary policy, public and private partnerships combined in the new industrial policy.

We believe the winners will be those countries and regions who possess both the fiscal space and the governance capacity to execute their industrial policy. This perspective is driving our investment thinking as we assess the various region’s capabilities in these areas & consider our portfolio allocations. 

China has led the way via its industrial policy success in the Climate space that has resulted in a dominant position across renewables from solar to wind, batteries to EVs. Amidst President Trump’s blizzard of Executive Orders (EOs) upon returning to the Oval Office was one to gut the IRA spending initiated under his predecessor for EVs, in effect ceding the Climate battle to China.

In Europe, we expect German elections next month to lead to an easing of its debt brake and a significant increase in fiscal spending to boost investment across the transportation and digitalization spaces. In Asia, we expect China’s March NPC meeting to include further fiscal support for domestic consumption. Its critical to note that both are being driven by domestic concerns: economic stagnation in Germany’s case, fear of deflation in China’s. Trump tariff threats are a secondary concern. We have noted how both countries have fiscal space with gross debt/GDP ratios around 65% vs 100% or more for much of the OECD.

We further note how China is already moving into Industrial Policy 2.0 shifting its focus and central Govt guidance from quantity of growth to quality of growth in what is being discussed as the “Hefei model”. China is taking the AI fight to the US with the release of the DeepSeeek LLM, produced in house as it were, rated as very similar to the best of the US LLMs and priced at a massive discount. 

Continued TPW competition should lead to a geographic expansion of the global growth cycle. This expansion should lead to continued commodity demand, sustained pressure on sovereign bond yields and earnings growth to support rising equity prices as the global equity bull market broadens out geographically as well. For all the talk about the S&P’s start to the year, Commodities are the world’s best performing asset class and European equity is up 7% YTD, far better than the US.

Notwithstanding the media focus on President Trump and his Executive Order deluge,  as LT, thematic, global macro investors we want to focus our attention on what the global cross asset market action is telling us. Davos & the President are both side shows.

When we reviewed the charts in this week’s model portfolio meeting we noticed a number of important signals. First, virtually all of our holdings in both models, our Global Multi Asset  (GMA) and our TPW 20 thematic model, are up YTD. Keep in mind that means roughly 40 -45 different ETFs covering all assets around the world are in positive territory three weeks into 2025. That’s very good news.

Second, we noted that there were very few overbought or oversold conditions and that only a handful of positions were under key moving averages. Third, we noted very distinct Commodity leadership with commodity producers representing three of the top 5 GMA model performers over the most recent period. Furthermore, we note that our Commodity BM, the GS Commodity Index (GSG) has broken out. This provides confirmation of our global growth view, augmented by PMIs breaking back above 50 in Japan and Germany among elsewhere. 

We have spoken in the past about paying attention not to the news but to the asset price reaction to the news as the key investment tell. Here the Trump tariff threat chatter provides lots of insight. Over the past month for example the Mexico ETF (EWW) is up 2% while earlier this week Trump suggested he would put 10% tariffs on China and yet FXI & KWEB were off only .5%. We believe much tariff fear has been priced in and those waiting for an all clear might miss the train.

In fact, the Chinese bullet train has already left the station. Over the past year China equity as represented by both FXI and KWEB are in bull markets up 44% and 27% respectively vs ACWI up 19%. FXI and KWEB have outperformed SPY & the QQQs over the period. These are facts not vibes. Facts you don’t read in the news.

With the Commodity breakout confirming our expanded global growth cycle view we now look for non US equity to break back above the 200DR to confirm our expectation of global equity bull market geographic expansion. We note that all three major non US equity segments: ACWX, EFA and EEM remain below their 200D levels. In the case of EEM its roughly 1.5% or so below; given all the angst around China & Mexican tariffs, Brazilian fiscal woes etc. we think that is a pretty solid outcome. 

The positive fiscal news we expect out of Germany and China together with a continued global rate cutting cycle should be sufficient to push these segments above their 200D resistance levels in the coming months. The US could also be a catalyst; we believe we are at peak Trump vibes and governing is going to be a lot harder than simply signing EOs.

Beyond watching the key non US equity technical levels, we remain focused on USD weakness and a reversal in the China Govt bond rally to suggest China’s fiscal stimulus is gaining some traction. A USD rollover would provide a significant tailwind to non-US assets. 

We continue to noodle on the idea of capital repatriation as well and think China’s  announcement this week that domestic pension funds and insurance companies need to buy domestic equity will not be the last. Japan could be next as PM Ishiba pushes fiscal stimulus while the BOJ raise rates and cuts back on its JGB purchases. Recall that Japan is the largest foreign holder of UST with over $1T in hand. Those positions when converted back into Yen have been big winners; the reverse will also be true should the dollar weaken and yen strengthen.

Given our existing positions, we believe a long cycle of global growth and an expanding bull market, both geographically and thematically, should provide both our Global Multi Asset (GMA) and our TPW 20 thematic model with a healthy tailwind.  Our GMA model is OW Commodities and EM equity, UW FI and remains zero weighted USTs. Space, Crypto, Defense, Semis and Infrastructure represented the top 5 TPW 20 performers over the most recent period. The broad nature of the leadership group speaks volumes to us.

Please enjoy a more in depth airing of our investment outlook for 2025 and beyond including our cross asset allocation and specific ETF outlooks in the Macro Hive podcast here.https://macrohive.com/hive-podcasts/ep-252-jay-pelosky-on-how-us-equities-could-underperform-rest-of-the-world/