Happy Friday,

Live from Bermuda and no shortage of topics to muse over: earnings, economic data from Spain to Thailand & points in between; abdications, coup accusations and more than enough political theatre to go around.

Hard earned experience (ie mistakes) inform me that earnings and economic data tell the tale and on both fronts the news is pretty good. Earnings across the board be it in the US, Europe or Japan seem to be coming in better than expected; those fearing an “earnings recession” have some thinking to do.

Why? Well first because Q1 EPS is coming in +3% y/y in both the US and EU vs forecasts for negative y/y #s. Second because the economic data is turning in favor of a growth bottom outside the US and the “lower for longer global growth path” we have been discussing. Whether it is new export orders in China, Q1 GDP in Europe or Manufacturing PMIs in much of Asia ex-Japan the growth bottom is coming into the picture.

That leaves policy makers a little askew as the Fed & Chairman Powell reveal with its inflation outlook. A short time ago the Chairman was quoted as calling low inflation “one of the major challenges of our time”; yesterday it was: “some transitory factors may be at work” in keeping inflation below target. It almost makes one yearn for the good old obfuscation of Chairman Greenspan.

Meanwhile like the tide the flows come in and go out: Vanguard’s tech ETF had its largest weekly inflow EVER last week… good thing UBER is coming to feed the ducks. Europe equity funds have seen outflows in 56 of the last 58 weeks (check out @tpwim for some good charts).

Over in commodity land the miners have been smoked while bullish bets on WTI outweigh shorts 14:1… to square the circle flows into long term US bond ETFs were expected to have a set a new record in April.

We stick to the letter E: Earnings and Economics, await further confirmation of Europe’s growth bottom (watch the BUND) and suggest that if you must sell in May that one consider profit taking in the US and buying abroad. Growth bottom plays like base metals, miners, have given back much of their recent gains - happy hunting.

We are excited to note our upcoming webinar in conjunction with the good folks at GlobalX. Please block off 2pm on Wednesday May 15th and sign up.

Where to find 2nd Half Opportunities

After a strong four month run to start the year, are US equities ready to keep roaring, or is it time to consider opportunities overseas? Join us for a conversation between TPW Investment Management's CIO and Co-Founder, Jay Pelosky, and Global X ETF's CIO, Jon Maier, and Head of Research, Jay Jacobs, as they discuss their outlook for the remainder of 2019. 

The trio will discuss a range of topics including: 

• The impact of the Fed on US and international markets

• Where to find potential opportunities in the US and overseas

• How to evaluate China and the emerging markets

• The implications of potentially lower for longer global growth

Have a great weekend!

Jay and Jamie

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Happy Friday,

Monday kicked off with a Bloomberg TV appearance on The Open, Tuesday meant a NYSE bell ringing with MSCI to celebrate 30 years of EM indexes ( see picture) Wed - Thursday were marketing heavy and now the Musings (seems like I just did them!).

BTV focus was on our “Lower for Longer Global Growth Path” thesis, the search for a growth bottom confirmation in China data (check), EU data ( patchy) and long bond backups in both China (check) and Europe (Bund remains a widow maker).

Like the Spring weather, the transition from growth deceleration to bottom and recovery outside the US will have it’s fits & starts - the question for investors is what to do about it?

Does one freak out over a minor China equity pullback or see it as nice, healthy profit taking? Should one throw in the towel on Europe once again or does one use weakness to gradually build positions so when the unequivocal all clear is sounded you are not joining the herd but welcoming it on board?

In that vein Tuesday’s MSCI event at the NYSE was fun, informative and well worth the trip down to Wall St. From the flag waving NYSE pump up video, to walking the warrens of the exchange, to trading war stories with my former Morgan Stanley colleague and friend MSCI CEO Henry Fernandez, to being on the podium for the closing bell on a S&P new all time high day…. it was just great.

After the bell MSCI also convened a round table discussion on the future of EM. There was lots of talk of EM ex-China with our good friends at Krane Shares, MSCI’s POV from Henry and others as well as my own 2 cents regarding concerns about the loss of the low cost manufacturing opportunity for EMs as well as the potential to leverage the vast number of EM eyeballs in an e commerce world.

All in all a lot to enjoy and to be thankful for…. TGIF and Let’s go Islanders (heading to game 1 tonight)!

Jay and Jamie

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Happy Friday,

Spring has sprung: birds chirp, flowers pop, trees bud & investors consider selling in May & going away.

This year it might be better to sell some US equity and go abroad. Its cheap (@tpwim), less crowded, your dollar buys more (way more) & you can visit places you haven't seen in years!

3 keys for risk asset direction:

1. China - US trade deal > more & more likely;

2. China growth bottom > data very supportive

3. European growth bottom > patchy data. EU PMI shifting from falling sharply to stabilizing to improving.

We want to see the bond markets confirm better econ data, thus Morgan Stanley noting that China 10 year bond yields have risen the most this month since Jan 2017 (roughly 30 bps) which is good news. As is Bunds back above zero.

MS further notes that China bond yields and European stocks tend to move together… has anyone been watching EU banks… bull case building people.

60% of S&P reports in the next two weeks. This will be a leadership test for Tech (22% of index), last week’s Healthcare collapse is worrisome (#2 at 13% of index), Financials (#3 at 13%) have had a post Earnings pop, Industrials (#6 at 10%) are off to a good start…

Shifting to FX, the trade action has been so sleepy its left sell side speechless. However, this JPM chart (global FX vol - USD moves); strongly suggests times this catatonic lead to big USD moves. We expect $ down which reinforces that upside argument for the non US markets.

Finally, the action south of the border has been cha cha like: buy Brazil, sell Mexico, sell Brazil (down 8% past 1 month) buy Mexico (up 9%)...IMF DC soiree seems to have thrown some cold water on enthusiasm for Brazilian pension reform plans…

Cut to a TPWIM commercial: Start next week off right with Jay on Bloomberg TV Monday at 9 am with Jon Ferro.

Happy Spring/Easter/Passover!

Jay & Jamie

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Happy Friday,

We continue to muse over the implications of a “lower for longer global growth path” including how to get there (confirmation of growth bottoms in China, Europe) & investment implications (ACWX vs SPY, yield plays etc).

Data flow is increasingly supportive of the growth bottom thesis in both China (lending, trade) and Europe (wage growth, IP). Rising long rates remain a tell: China 10 yr at 3.3%, highs for the year while the 10 year BUND breaks back above the zero bound. Rising rates = bullish for banks... European Banks anyone?

Any bets as to whether this week’s IMF downgrade to global growth is the last one for this year? I think so.

Thinking through the investment implications of a “lower for longer global growth path” led us to some charts showing ACWX vs SPX (Rest of the World vs US) over multiple times periods: 10, 5, 1 yr, YTD, 1 month. The scope for catch up by ACWX is staggering while it searches for a bottom (see chart). ACWX has room for multiple expansion (key in low growth world) and new owners; SPY is over owned by ROW and arguably has little room for multiple expansion.

Lots of talk about US High Yield, but one of the most interesting facts I learned this week was that European HY default rates are well BELOW that of the US which is quite low itself. As EU peripheral yields collapse & growth stabilizes, EU HY yielding almost 4% vs. EU Investment Grade which yields 1% looks interesting (Japanese investment flows in EU HY at 6 yr high).

In US HY it is noteworthy that HY energy names have not followed the oil price higher, suggesting perhaps further room to perform even as HYG hits a 52 week high.

UBER’s IPO is generating all kinds of noise - gotta love the line that it may never make a profit… Silicon Valley has really taken the phrase “you have to spend money to make money” to an extreme. LYFT trading down 15% from IPO price suggests the froth may be in the private, not public, markets. A massive loss maker coming to market just as tech buyers start to digest the idea of US tech EPS down 10% y/y in Q1….hmmm, good luck with that.

Finally, the Tri Polar World’s (TPW) regional integration process both ebbs (Splinternet) and flows (Asian connectivity). The Macro Polo folks had a good read (ARTICLE) on how China is speeding up Asian integration, nice 3rd party confirmation as to why we call Asia the TPW’s Proactive Region.

Have a great weekend and LET’S GO UMASS (NCAA Hockey Finals tomorrow night); LET’S GO ISLANDERS!

Jamie & Jay

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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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