Happy Friday,

Tricky transitions challenge investors, much like the transitions that challenge Brazilian beach walkers when rivers reach the sea as I learned in Bahia this past week. Ocean waves crashing in, river current pushing out, no clear pattern, can't tell the depth but have to cross to continue the walk. As investors we too have to continue the walk.

We are in the midst of several transitions. In the US from tax cut stimulated growth to more normal (lower) growth and in the Rest of the World from growth slowdown to slow upturn (China, EU, EM). US Treasury are rallying on slower US growth (though today’s response to weak PCE # suggest rally is ebbing) while commodities and stocks suggest better (ex US) growth ahead… Dr. Copper up 3% today, 12% for the Q while commodities are Q1’s best performing asset.

Back in NYC & prepping for Wednesday’s Bloomberg Daybreak appearance (good clip here) it struck me that the transition to “lower for longer” can apply to global growth as well as rates. This idea builds off the work TPWIM has done on Potential Growth Rates (PGR) and Neutral Rates of Interest (NRI) both fundamental parts of our Global Risk Nexus Scoring System.

In the clip I discuss how investors need to recalibrate to a world of lower Developed Market growth rates & thus lower rates of interest. The Fed recalibrated and the result was a shift from “Autopilot” to no cuts in the space of a few months.

Our focus remains on the consumer and here the news remains pretty good especially outside the US. German has record low Unemployment Rate (UER) and very strong retail sales (+4.7% y/y), and there is better than expected Japanese UER (2.3%) - maybe Japanification isn't all that bad.

Lower for longer growth is a pretty good environment for risk assets… less risk of being upended by CB tightening in return for more muted return profiles. Yield plays remain attractive. A growth scare suggests when all clear is sounded on China - EU growth moves will be big (Q2 IMO).

The 3 Steps for risk assets remains intact: Anticipate, Confirm, Reallocate. Q1 risk asset performance provides the anticipation, we await confirmation of ex US growth bottoms this coming quarter and expect that to spur reallocation outside the US which in turn will spur a weaker USD.

Have a Great Weekend!

Jay & Jamie

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Happy Monday Morning Musings!

We are starting the week with a triple “M” tongue twister Musing and including for a second time a simple high level view of the markets we call “Skyview”.

Excitement continues to build over China and EM. We remain constructive (See Jay’s appearance on BloombergTV last week) but think better opportunities lie elsewhere right now.

Namely Japanese and European equity, which no one is talking about and which will be big beneficiaries of a China growth bottom. Euro shorts are at 2 yr highs while outflows from EU equity are characterized as “extreme”. Japan has the 2nd largest individual country weight in ACWI at 7% but gets virtually no attn.

Our latest Monthly piece introduced the 3 Steps we see needed for risk assets. Step 2 is to confirm the growth bottoms in China and Europe. That confirmation needs to come from the Government bond market in each case.

There seems to be a big dichotomy between Stocks/Credit in the US and Europe and Bunds/USTs. A back up in LT yields would seem necessary to confirm growth bottoms.

Soon enough Q1 Earnings will be upon us – it will be interesting to see US investor reaction to down #s on y/y basis. Ultimate test of “look thru” investing?

Let’s have a great week!

Jamie & Jay

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Happy Friday,

Outside, March has come in like a Lion for us in NY with a frosty morning but inside the screens continue to be green across the board.

The 3 keys we have highlighted to support risk assets (China trade deal, EU growth bottom, China growth bottom) look to be upon us. Trump’s NK walkaway sets up a “tough Trump” to declare China trade deal (any trade deal) a big win.

Yet thinking it thru suggests this is only Step One in the bigger picture.

Step 2 requires bond market confirmation of better growth days ahead. Bunds in Europe, China’s 10 yr and the 10 yr UST need to confirm the growth turn. Definitely want to be UW duration on global basis.

Step 3 is USD weakness - its almost universally agreed that the USD is overvalued but Euro/$ net shorts are at 2 yr highs…looks like it's one of those gotta see the whites of EU growth’s eyes before believing it. The lack of faith in Europe is probably one of the big macro opportunities out there. EUFN is acting well… keep an eye out here.

Speaking of USD weakness what is up with the US trade deal demand for a Stable Yuan? Could it be that the US really wants a weak dollar and needs to lock China in first? (I recently was interviewed for ETF.com on China).

We are in this weird spot of having had a rocking start to the year across assets, leaving many extended and yet risk positioning is very light whether one considers hedge funds net levels, mutual funds cash positions etc.

Couple that with a potential global growth turn, a Fed that is now well aware it needs to manage the outsized financial assets (CHART) & the onset of a global easing cycle suggests Team Retest is gonna have to sweat it out as all that cash is likely to cushion downside risk. Pause, pullback yes, Retest seems less likely.

Not a bad takeaway for a Friday - TGIF!

Jay & Jamie

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Happy Friday,

Economic news continues to be weak yet risk assets continue to rock - what does that tell us?

Markets sniffing out the turn perhaps with faint glimmers of better econ news in both China and Europe. We have been of the view that we need 3 things to take risk assets higher: China trade deal, EU economic bottom, China economic bottom. Markets are telling us we are close on all three.

March could be interesting with Fed potentially ending QT while the ECB preps another round of TLTROs for the banking sector – that would be great news for the beaten up EU banks (EUFN), which have held in well the past two weeks in face of bad news from UBS, HSBC, etc. Jay was recently on Bloomberg TV discussing a beginning of a global easing cycle. (CLIP)

US pushing for China Yuan stability pledge - why, thank you very much President Trump. Chinese equities look to be in early stages of a bull market fueled by fiscal & monetary stimulus, a bottoming economy and foreign/domestic investor lack of participation.

Regarding things to look forward to, many may be aware of the May EU Parliamentary elections but how about the likely Brazilian Congress votes on pension reform? The latter could well turn out to be more important.

Speaking of overlooked, could it be that the much maligned commodity sector is staging its own bull market? Dr. Copper has put in the prescription for higher prices, up 6% on the week (sorry, sick this week so have docs & prescriptions on the brain). A loose Fed & China stimulus that is starting to take root (did you see the total social lending #s), would seem to be just what the doctor ordered. Gold up on prospects for a global easing cycle to begin + CB buying in size; oil rallying on the back of OPEC production cuts, base metals up 4% or so on the week.

How about all that cash on hand? US cash up .5% ytd vs Barclays AGG up 2x that and global equity up 20x. Safety is expensive with the safest stocks (hi quality, low debt) trading at 25x forward vs 16-17x SPY. Buy the dip would seem to be inevitable.

But isn’t the question will we get the dip? Well, 5 of the major assets: US stocks, US IG, US HY, oil and gold are all over overbought at 70+ on 14 day RSI for the 1st time since 2000…. a pause seems likely

Enjoy the weekend but don't party too hard….

Jay & Jamie

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Happy Friday,

 

A packed three days at the Inside ETF Annual Conference provided some food for thought.

Big is Bad was in the zeitgeist… Billionaires (H Shultz), Big Tech, big meals, etc. The Hometown news that Amazon would not move forward with its NYC HQ2 plans seems to cement the thesis and has to send a shudder through techland. Could antitrust be a real threat?

EM captured a lot of attention (I spoke on an EM panel) though tinged with concern over the China trade tiff and the brewing fight over AI. Given the US economy a trade deal is a done deal IMO. News came during the conf that the US would launch its own American AI Initiative; Splinternet anyone?

I spoke of the potential turn to a global easing cycle led by EM Central Banks as China eases & India cuts rates, while Turkey & Brazil are is likely to follow suit. This sets up the Commodity segment, especially metals and mining to augment gold and oil.

DM ex US, aka Europe and Japan, got no play whatsoever. Europe reminds me of the old adage - the news doesn't have to get better, it just has to get less bad. I think we are getting close in terms of European econ data. Japan is a cheap global cycle play with an underlying PE bid.

This in turn suggests the German Bund yielding 10 bps is gonna be one heck of a short as soon as the econ news starts to turn. Bill Gross retiring and blaming the Bund trade for his poor performance reminds one of Julian Robertson of Tiger’s famed walkaway in the final days of the dot com bubble.

The search for yield was a topic across the conf and in the markets as EU periphery debt finds ready buyers, EM debt continues to do well while US HY has been an alchemist's dream - turning what was dross a few months ago to gold today. Remember the BBB threat - not so much.

The pain trade is clearly higher: higher stock prices, higher HY prices, and higher risk asset prices. As the chart shows, cash levels are at highest levels since 2009…. Could buy the dip be coming back? (See Chart)

One thing that is coming back is the old song: Video killed the Radio Star… video was everywhere down in (appropriately named) Hollywood FL; we will have some good clips in the next weeks from our friends at ETF Trends and Asset TV among others…. Something to look forward to 

Enjoy Presidents Day Weekend

Jay & Jamie

 

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Happy Friday,

From the worst December since the Depression to the best January in over 30 years, it's been V for Volatility.

Fed whipsaw action (see chart) is only the latest catalyst. My 2 cents is Fed heard the argument that financial markets have caused last several recessions and in the age of machines its more dangerous than ever to get behind the curve.

A low growth, low inflation world = a world of low potential growth rates (PGR) and neutral interest rate (NIR) structures. In turn, that is a new world that policy makers & investors need to get used to. BTW, both PGR and NIR are key components of our Global Risk Nexus (GRN) scoring system.

This suggests we are closer to the end of the rate tightening cycle and the beginning of a global easing cycle than many expect - question is whether Fed or EM CB’s lead the way?

On BTV's The Open show w Jon Ferro earlier this week Jay highlighted 3 conditions for sustained risk asset recovery: China trade deal, growth bottoms in China & Europe, and CB stability.

Check the CB stability box for now. A China trade deal looks likely as Pres. Trump preps his “only I can fix it” one on one with Pres. Xi (really set up by the Govt shutdown). Simple repetition of China’s offer to buy more stuff does raise concern that China feels it has Trump over a barrel.

Economic bottoms are becoming closer as China stimulus = to 5% of GDP (according to JPM) combined with EU fiscal stimulus. Watch the consumer: consumers in US, China and EU all in good shape. Once data supports a bottom it's gonna be a food fight in EU and China equity & a bloodbath in Bunds.

Enjoy the Super Bowl – Jay is a Mass boy born and bred so his marker is on the Pats!

Jamie & Jay

 

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Happy Friday - lots to chew over.

The longer the US Govt shutdown lasts the greater the chances that the Fed will rethink its “QT on autopilot” stance as consumer sentiment suffers. The shutdown also improves the chances for a US - China trade deal - no way the US can handle both. If the shutdown ends (today’s LaGuardia shut down suggests we are getting close) then markets can respond favorably - so a win-win.

Cross asset correlations are at a one year high as V for victory plays out (See last week’s Musings). QT adjustment could be catalyst for correlation breakdown as dollar breaks lower while gold rallies and non US equity outperforms.

So far we have seen the best January in almost 30 years which reflects the magnitude of December’s collapse which priced in a boatload of bad news. Weak EPS and lower guidance (see chart) is in the price. Look no further than the banks last week & the Semis this week. It's not the news but the reaction to the news that tells the tale. Back to buy the dip?

It's not just poor earnings that are priced in as European equities rally sharply in the face of deeply disappointing EU and German econ data releases. Who doesn't know that European growth is below expectation?

EU silver lining alert - strong real wage gains and decade lows in unemployment should lead to better consumption and service sector activity (German Service PMI up 2 months running). We are focused more on the consumer than on the manufacturing side of things.

For some weekend reading check out the Economist cover story this week - Slowbalisation (Link). Great validation of our Tri Polar World (TPW) thesis - one we have been working on for going on 7 years.

Enjoy the weekend!

Jamie & Jay

 

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Happy (3 day weekend) Friday Musings,

V for victory, V for V shaped market bottom, or V for victim as market hurts most folks most often? So far the V shaped bottom has been in play (S&P is up 13.5% from Xmas eve close!) but lots of market segments hitting resistance levels - be careful out there.

Markets need further confirmation to go beyond just recovering from the disastrous December. So far so good as a Fed pause, China trade truce, and EPS beats (though low bar) have been sufficient. Going forward, the market will need to see China trade deal confirmation, Europe/China growth bottom, and continued confirmation that the Fed won’t “murder” the market as Bernake so eloquently put it.

What if this is NOT the end of a bull market cycle but rather the end of Fed tightening cycle which is already the longest on record? The US is at risk to both too strong growth = Fed hikes rates & too weak growth = EPS shortfall. The Rest of World would welcome growth.

US Political Risk is rising. While the tit for tat between the President & the House Speaker is childish the rising talk of impeachment is not. Watch the growing chatter about a potential rapid collapse in Republican support for Pres. Trump.

Speaking of Nancy and Donald the US Govt shutdown is not good for consumer confidence as the latest UM sentiment survey suggests (biggest decline in over 6 yrs). The consumer is key as consumption will drive production. Elsewhere, China’s policy push is to increase consumption while Europe's high wage gains and low unemployment support consumption.  A silver lining from the growth scare is the policy response which could elongate the economic growth path.

Look to Europe and Japan for DM laggard opportunities, and on pullbacks to LatAm equity for both growth (Brazil) and value (Mexico). In the US it is great to see how banks have traded this week. The market needs new leadership & if financials can give it that would be a plus. 

Watch debt markets closely. Overall debt refi amounts + QT + deficit financing worry a lot of folks. Market pressure to force the Fed to put QT on hold could be catalyst for a retest

Enjoy the long weekend!

Jamie & Jay

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