When Facts Rock Fiction

1390 words – a 4 minute read.

Excited to finally get to use this title – it’s been in the back pocket for quite some time but after this week’s global, cross asset, market moves its time. We had the opportunity to try it out on BTV’s The Open show this morning; today’s Musings come straight from my notes for the hit.

The full line is “When Facts Rock Fiction, Always Cause Friction” (any guesses as to band or song? LMK). The facts: growth #s, job #, CPI #, PPI #, Earnings #s are rocking the recession, bear market fictions that some have held on to for far too long as Citi’s ESI hits a new 52 week high.

The friction that results has led to a pretty epic week of cross asset moves, to wit: DXY under 100, new 52 week low and worst week in 3 years. We wrote about the record short yen position last week  & talked about picking up pennies in front of a steamroller - well guess what, those folks just got rolled with the Yen up roughly 5% vs the USD this week.

In FI, we saw just massive moves in the UST market with 2 year and 10 year bonds rallying 40-50 bps in a week as the smart money had to reverse out of their record short UST positions – really, what is it these folks do – record short the Yen and UST – really? Here is Bespoke: “Large speculators are net short about 780,000 contracts on the 10-year note futures, the large short position EVER!!”.  Meanwhile, StoneX reports speculators are extremely short WTI, with positioning the lowest since 2016 – goody!

Goldman Sachs weighs in on the equity front: “Prime brokerage data from Goldman Sachs shows that hedge funds have the lowest weighting to the US stock market since the records began in 2013”. Ouch – this week must have really hurt.

The buy side smart money has a real competitor in Wall St’s sell side strategist camp (I used to be one so not casting aspersions just reporting facts). As our buddy JC at All Star charts put it: “we just had the greatest first half to a year in the history of the Nasdaq. There's never been a better one. Ever. And do you know how the sell side analysts responded? Only with their most bearish second half outlook on record...to get to av YE target from 6/30 close - biggest loss since records began in 99”… Hmm, most bearish outlook on record , yes, we will take the other side.

Our main takeaway: The positive inflation data takes out the Fed overtightening risk (whether or not they hike one more time in a few weeks). This activates one of our key investment mantras: Fed on hold = USD down = ROW Equity/ Commodity up. All the smart money short covering means the real money flows have barely started providing support for our BTFD POV.

We wrote about Rotation  2 months ago and our shift from Big Tech leadership (the Magnificent 7 and all that super hero stuff) to Cyclicals to position for that early cycle recovery we have been discussing. Over the past month: SPY +4%, Qs +5% but Transports (IYT) & Homebuilders (XHB) both up 10%.

This week we moved into the rotation’s 2nd phase based on our mantra above. Here is a sample of the last 5 days returns: SPY +2%, Qs +3%, EFA + 6%, EEM +6%, COPX +11% (yes copper miners up 11%) and KWEB up 14% (you recall KWEB, China Tech).

We are moving out of a very favorable period for US equity and into one where seasonality is not very supportive till mid October. If one has been fully invested as TPW & our clients have been, it probably makes some sense to take some profits, particularly from US tech and rotate into EM equity and Commodities.

We have rotated from US tech to Cyclicals and from US to Europe, then Japan and now EM. Within EM, China might be ready to shine as the Govt makes nice with its key Tech platforms, boosts policy support for the all important housing sector and prepares more policy support to come with its month end Politburo meeting. China equity is very cheap, (10x forward PE) sentiment is horrible yet is likely to grow GDP 5% + this year – more than double the US or EU.

Here is China expert Trivium on the platform companies & the Govt: “As long as platform companies play by the rules, the domestic “tech crackdown” is over”. KWEB, for example, has been a massive UPer vs US tech ytd – some catch up makes perfect sense.

Commodities are starting to break out with the GS Commodity Index (GSG) just breaking back above its 200 Dmav as oil catches a bid after Brent suffered a rare 4 quarter losing streak – the worst since 1988. WTI is back above its 200dmav of $75.55 for the 1st time in several months. We expect global ISM Manufacturing to catch UP to Services and see XLI’s new 52 week high as confirming that POV.

Here is JPM on positioning within the commodity space: “For scale, investor positioning across energy, base metals, grain and oilseeds and environmental/carbon markets is largely on par with or weaker than those at the peak of COVID”. The peak of Covid you say… look out your window, does what you see bear any resemblance whatsoever to peak Covid???

Beyond the short term, we remain very constructive on the medium term outlook over the next few years as we wrote in Birth Of The New. The deployment of New Industrial Policy will result in a high nominal growth world where 4% 10 yr. UST is a feature not a bug as Central Banks accept inflation of 2-3% while the new AI Innovation Cycle boosts productivity and caps inflation risk.

Our analogue remains the 2H of the 1990s in the US – the last time there was a cap ex boom and productivity surge (Internet then, AI now). This time its global though as the TPW’s 3 main regions realign supply chains and co invest with the private sector to deal with the 3Cs of Covid, Climate & Conflict.

LPL agrees with our 1995 analogue & recently wrote the following: “The year 1995 stands out with a high correlation to 2023 and a relatively similar macro backdrop to now. During the first half of 1995, also a pre-election year, the Fed paused an aggressive rate hiking cycle after tackling higher inflation and avoided a recession. Given the relatively high correlation between the first half of 1995 and 2023, and the similar macro backdrop between now vs. then, we used the second half return progression of 1995 to forecast the return progression of the S&P 500 for the remainder of 2023. Under this scenario, the S&P 500 would finish the year at 5,032 (+13.1% from the June 30 close)”. Sounds good to us!

We are in the midst of 5 major transitions: from rate hikes to rate cuts (EM inflation of 2% allows their Central Banks to lead); from a myopic focus on monetary policy to an expansive fiscal policy focus; from recession fears to early cycle global recovery led by Asia; from Bear Market fears to Risk Asset Rotation & from the US to the ROW.

Across our two model portfolios, our Global Multi Asset flagship (GMA) and our TPW 20 thematic model, we have deployed 5 investment barbells: within global equity we have the US & non US with an EM tilt; within US equity we hold AI related tech & Cyclicals; in the FI space we hold US HY and EM local currency debt; our Cross Asset barbell includes Digital & Physical  (Commodities) and our Thematic barbell incorporates Future Tech & Climate.

Here is our good buddy Stephen Jen on EM debt: “IMF research outlines that foreign ownership of EM debt is close to historical lows. Finally, from a market perspective, EM debt and currencies are likely to be underpinned by significant carry, cheap valuations, and light positioning”. EMLC was the best performing FI ETF in 1st H; it remains one of our biggest FI positions.

Any guesses as to band & song? Here’s the link – play it loud! listen to steel pulse blasphemy