Happy Friday,

We wish the First Couple a speedy recovery from Covid-19. Assuming full recovery, the bigger political news is debate/stimulus driven. The debate was a disaster for the President & may have sealed his political fate. Post-debate polling moved sharply in favor of both a Biden W and a Democratic sweep of the Presidency, House, and Senate.

Thus all the angst over when the election results will be known (well deserved given the President's comments) may well be for naught as the bigger the Biden margin of victory, the less likely any drawn out affair. With a month to go and voting underway in many states, a quarantined president is unlikely to make up lost ground.

Odds are rising that the results will be known either the night of Nov 3rd or on the 4th… as we said last week, watch Fla - if it goes for Biden, then the electoral math doesn't work for Pres. Trump. The Green Energy complex in the US is already starting to price in a Biden win. Check out this week’s action in QCLN, ICLN, BLNK, etc.

Turning to the stimulus talks, the failure to agree is eye opening as passage would seem critical for the President’s chances. The House passed a $2.2T bill but Senate Republicans are balking which begs the Q of whether they are cutting the President loose. It also begs the question of what they are going to campaign on.

Near term, this may matter - longer term we don't think it will. We expect post election stimulus regardless of the victor, coupled with rapid testing/therapeutics and a vaccine in the coming 3-6 months. (Recent reading suggests that infectious disease vaccines in stage 3 trials have an 85% chance of approval).

A synchronized global economic recovery coupled with record setting liquidity & awaiting a vaccine could set off BOOM conditions next year.

The divergent results between a goods producing recovery & stagnating services remain something to watch. It's important to note that durable goods data reflect both lack of inventory as well as surging demand for homes, furnishings & autos, especially in the US. Demand which has much greater multiplier effects on the broad economy than do services.

We continue to be on the lookout for US inflation signals as pent up demand (US personal savings rate @ 14%, record household net worth, household debt as % of disposable income at 20 yr. low, etc.) meets inventory shortfall.

This scenario suggests long US rates are at riskto asharp backup; risk-reward seems quite unappealing - today’s selloff on Trump news & weak jobs # is telling. The MOVE index (UST volatility) hit a 20 yr. low last week - unsustainable…next elevator up?

A vaccine or Dem sweep would do the job. Rates are the fulcrum for the Rotation Trade, the upending of risk - parity, 60-40, etc. Higher rates catalyze the Equity Rotation Trade (from Tech to Finance) & capsize the historic Sovereign long bond rally.

Furthermore, banks have been huge buyers of UST - as the economy improves & credit demand grows, their UST appetite will fall while supply remains gigantic. The days of stocks & bonds rallying together are over.A 10 yr. UST rate over 1% & 30 yr. approaching 2% by YE is quite feasible.

The next non-US data point to watch is China travel and spending over the National Day holiday week which should give a real-time update of the Chinese service/consumer segment. August retail sales in both Germany and Holland were quite strong while September EU econ conf #s hit a 6 month high - 2nd wave headlines over the top?

Speaking of Europe, the latest inflation data suggests the ECB is not joking when it says it is thinking about joining the Fed in the Alternative Inflation Targeting (AIT) regime. EU Core inflation hit +0.2% y/y last month, a new record low. The RMB might end up being the only strong FX around...

Enjoy the Bloomberg TV clip - in case you need more support for the “Screaming buy” thesis note that HSBC, EUFN’s 2nd largest holding, is sporting a double-digit dividend yield (assuming ECB allows for dividend pay out next yr.).

Please note no Musings next week - will be ruminating among the mountains on a Fall foliage trip!

TGIF!

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Happy Friday,

Jay did a Bloomberg TV & Radio back to back last night; his prep notes make up the bulk of these Musings.

In 7 minutes, Jay covers the Rotation Trade - both sectoral and geographic, US election risk, Asian equity market outlook and an ESG/green energy ETF opportunity.

The Fed has limited ability to move the needle - for either the economy or markets - that's our conclusion after this week’s Fed meeting & equity market reaction. We have entered Peak Fed.

After all the talk about liquidity driven markets, investors now face the same turn as policy makers: future economic and market drivers will be fiscal policy led not monetary.

Regime changes are in play across the globe & in virtually every sphere: climate, equality, policy, politics & markets. Our TPW framework & Global Risk Nexus (GRN) structure continue to serve us as excellent guides.

The portfolios that have led this yr and in past years (US, tech equity, long bonds, USD) are unlikely to lead in the years ahead.

And so to Fiscal, S&P weakness is pushing on an open door. The White House is desperate for a stimulus deal, for at least 3 reasons: first, the pushback from CDC and others about the imminence of a vaccine, second, the clear sense that the economy is slowing, while third & perhaps most important, US early voting is underway.

Yes that's right, votes are being cast as you read - there’s been a ton written on how the decision won’t be on Election night but rather Election Week or Month but the key today is to note early voting has begun. That colors everything.

Most importantly, underneath the record setting Nasdaq pullback and the subsequent sloppy trading, the rotation trade continues. The trade is both sectoral and style driven as well as geographic in its breadth.

Given a likely stimulus deal (WH is essentially negotiating with itself & Rep Senate - could they cut Trump loose?) coupled with the advent of rapid testing (Big 10 football!) and a vaccine in coming months (Speed of Science) the rate back up we expect to act as the fulcrum for the shift from Growth/Momo to Value/Cyclicals is coming closer by the day. Some rough #s: S&P Growth down 6% MTD, S&P Value down less than 1%. Tech down 8%, Materials up 6%.

The geographic shift is underway; from US to the non US markets which represent cheap & under owned value and cyclicality without any of the US election risk and ham handed fiscal delay. The delay in providing fiscal support is likely to impact US Q4 and 1H 2021 GDP and not in the right direction. Weak econ = weak stocks, weak stocks = weak economy. Rough MTD #’s ACWX up 1%, Japan up 2.5%, Europe up 1% and surprise S&P down 4%.

Contrast the inability of the US system to extend stimulus with that of Europe where France, Germany and Holland have all done so in the past few weeks. The money quote: “Great, call me when he’s at $2.2T”. House Speaker Pelosi to Treasury Sec. Mnuchin on Wed phone call.

It's worth noting the wide spread between how the US is viewed by the rest of the world: the worst in the past 20 yrs according to Pew Research and the record wide valuation gap between US and ROW equity. Tech has been a mighty shield.

Did you catch any of EU Commission President von der Leyen’s speech this week about the EU, its Joint Recovery Fund (JRF) and Green Deal? Things are happening in Europe & its medium term strategic direction is being set; the latest example being joint issuance of roughly $250 B in green bonds - hitting 2 birds with one stone - joint issuance and green bonds. Could they become a European safe asset?

This week’s EU money quote: “The EU has to define its own interests, has to be strong and independent - from both China and the US. This is crucial to be successful in the 21st century”. Bruno Le Maire, French Economy Minister. Ahhh, Tri Polar World anyone?

Within our Tri Polar World construct, Germany is leading European integration while China is doing the same in Asia with its dual circulation strategy. Lacking US leadership, the Americas are stuck in Neutral.

The world is in the early stages of a synchronized global recovery, the first in over a decade. The service PMIs of Germany, China, US support this as does the abundant global liquidity with M2 now roughly $9T, well above the levels seen in 2009 and enroute to possibly $15T by mid-2021 according to JPM.

Earnings revisions have bottomed and Q3 GDP #s should be a blowout while Q3 EPS season is also likely to be BTE; one should not be bearish here. Positioning is much better and sentiment has also improved sharply (less bullish).

As we have noted for some time, investors should be positioning for the equity rotation & away from the USD & long duration Sov debt… a mini taper tantrum is increasingly feasible in the months ahead.

Starting to feel like Fall here in NYC, have an amazing weekend!

TPW Investment Management Team

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Happy Almost Friday,

Jay will be on BTV’s The Open at 9:30 tomorrow morning to discuss recent market action - be sure to tune in! Below are his notes for the segment.

On the Anniversary of 9/11 tomorrow we are reminded to Never Forget. #NYCStrong

NOTES

The healthy pullback foreshadowed in our August Monthly (link) is likely in its end stages, cleaning the froth from an overextended & overbought tech led, US equity market. Like a late summer thunderstorm, this correction serves to clear the air and allow for a change in temperature or in this case a change in equity leadership.

More important than the tech selloff is what's happening underneath, namely the rotation trade from Growth to Value and from Defensives to Cyclicals. Sparked by two data points: The CDC alert to prepare for a vaccine by Nov 1st and last Friday’s BTE jobs report, Value has sharply OPed Growth while ACWX OPed the US.

We view rising rates as the fulcrum for the Rotation trade, spurring on Cyclical/Value led by financials, materials, industrials etc while simultaneously harming Tech’s cash flow led valuation support.

Rising rates are kryptonite for tech; we expect rapid testing/vaccine to stimulate economic activity & lead to rising rates, especially at the long end which now has to bear all the inflation & supply related risks given a pegged short end.

Speed is the signature of the Covid Age and speed of science implies rapid testing & a vaccine in the next 3-6 months. Science, coupled with continued economic/EPS recovery (EPS revisions have bottomed & are turning up) support our constructive view on risk assets. During this pullback we have added to cyclicals/value & non US DM equity.

We remain negative on the USD and believe long dated Sov debt is at the beginnings of a bear market. A mini taper tantrum in long rates over the coming months cannot be ruled out.

We continue to follow our Covid investing formula with its focus on regions/countries that are controlling the virus, reopening fully and stimulating their domestic demand. In a trade contentious world it's all about stimulating domestic demand. Who has it and who can generate more of it - see China’s new dual circulation strategy (DCS). Investors, invest accordingly.

Big changes are afoot. We share the recent Bloomberg podcast with Paul McCulley (link) where he lays out some of the same changes we expect in the years ahead, namely the shift from monetary policy leadership to fiscal policy, the shift from capital to labor, the push for inflation (supporting the Fed’s new AIT strategy) and the likely impact all this will have on financial assets.

US - China decoupling, the shift from global to regional supply chains, the need to generate domestic demand, all serve to set up the shift from monetary policy (essentially exhausted) to fiscal policy (cheaper than it has ever been given rate structure).

In this vein, we note the governance distinction between US failure to agree on further stimulus and the recent decisions to provide further stimulus by Germany, France and Holland (one of Europe’s Frugal Four btw). The coming weeks should witness further fleshing out of Europe’s Joint Recovery Fund and Green Deal (we have been adding to clean energy during this pullback).

McCulley says democracy is at stake and that may well be true. As investors, we prefer to say that such a policy shift will end the US financial asset dominance of the past decade plus. We view the USD decline as a precursor to similar underperformance of US equity.

Thus to US political risk which looms large via a potentially close election leading to a disputed outcome (bearish US risk) and the implications of a 2nd Trump term. The worst set up for US risk is a Trump 2nd term coupled with a vaccine - governance challenges combined with tech kryptonite would spell relative underperformance vs more Cyclical/Value led regions.

The gridlock implied by a Biden presidency and a Republican controlled Senate would also be US risk negative - US cannot afford 4 years of gridlock in an era where fiscal policy matters more and more.

This is especially true from a Tri Polar World POV where China’s DCS implies further Asian integration while Europe makes a bid to own the Decade of the 2020s.

Back to School, Back to Work….

TPW Investment Management Team

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Happy Friday,

It appears the US will test the thesis that investors are protected from downside risk: either economic recovery continues or stimulus will be forthcoming. A DC deal along the lines of state funding in turn for corporate liability protection seems feasible.

Continue to expect Senators getting an earful while on break will lead to a September deal but falling markets may be required to move the White House along.

The fear of underperforming keeps sellers at bay as August volumes at least act like it's August. Over the past month, global equities are up 3% + led by the US up over 4% led in turn by Tech up 5% as Mr. Market converts poor seasonality into new ATHs.

Could US tech now benefit from ex US tech outflows on continued Splinternet fears? A real breakout from here requires more than just tech though and the lack of stimulus retards the necessary broadening of equities into Cyclical and Value sectors.

Many assets are testing key levels: stocks, bonds, gold, Dr. Copper, the USD etc. The 10yr UST action past 2 weeks encapsulates the risk asset tug a war we wrote about recently; last week’s near record rate spike followed by this week’s sharp retreat from key overhead levels wags the rotation trade. The USD has been down 8 weeks in a row and the VIX just broke 20. Expect continued choppiness.

Near term, we continue to focus on our Covid investing formula: control virus > broad reopening > domestic demand recovery (key given global trade woes) > stock market rotation > Asia/Europe outperform.

The counter is also important: failure to control virus > sluggish reopening > limited domestic demand > more stimulus needed > rising political risk (stimulus fatigue) > FX impact (USD). This is the state of the US.

Longer term, i.e., the next six months are likely to tell the tale - either we get an effective vaccine or we don’t. We don't need a weatherman to tell us which way risk assets will trade off that.

While EU/Asia have OPed the US over the past 3 months in August it's been all Tech and hence all US which begs the question why isn't European equity (EZU flat for month) in particular performing better?

Is it just taking a breather, is the Euro bounce to 1.18 a weight too heavy? PMIs today were not great but also not all that bad and talk of European outbreaks vastly overstates the #s when compared to the US with its 40k + daily caseload.

Other concerns continue to percolate: US political risk as the two candidates square off, US - China bashing goes to a new level. Political risk as we see it comes from tighter poll #s which will stimulate worries about a contested election (2000 suggests that's NG for stocks) while the RMB hitting 7 month highs suggest markets have taken on board continued US challenging China across tech space.

No one said it was gonna be easy (other than the robinhood bros) and so it isn't. Will August have a sting in its tail?

Stay tuned & stay frosty!

TPW Investment Management Team

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Happy Friday,

Jay was on BTV’s The Open show Monday (min 38-44) highlighting the investment implications of a synchronized global economic recovery (link).

When China, the country that arguably has benefited most from globalization, highlights its desire to drive internal demand (new “dual circulation” paradigm) it suggests that globalization is indeed evolving.

We continue to see that evolution as moving toward regional integration in Asia, Europe and the Americas… what I call the Tri Polar World (TPW), a thesis Jay developed roughly a decade ago and one which serves as our framework for analyzing global macro here at TPWIM.

In January we updated our TPW view to incorporate Tech and Climate (TPW 3.0 link). Some seven months later tech is becoming a big driver of deglobalization: after 20+ years of being seen as a globalizing force all of a sudden it's Splinternet, its Clean Network USA, its smash and grab, Tik Tok takeout. The lack of a global cyber framework is glaring.

The growing strategic rivalry between the US and China drives much of this but some is thrust upon us by Covid-19, some by the America First rhetoric and actions of Pres. Trump. I struggle to understand the US approach to China - it incentives China to become a stronger competitor in the leading segments of technology and finance without focusing on what the US needs to do to strengthen itself and its hemisphere.

The Americas’ lack of integration, esp between N and S America, is becoming more and more noticeable as Asia integrates its N Asian tech chain with its S Asian production platforms & consumption centers.

In Europe there is the growing recognition that post Brexit, the EU has more flexibility, not less, as witnessed by the Joint Recovery Fund (JRF) agreement - a deal the UK would most likely never have signed off on. Brexit is good for Europe… something we wrote at the time and which increasingly seems to be manifesting itself.

The JRF and its tie in with Europe’s Green Deal (note the regional approach) sets the stage for common taxation to back stop common debt issuance. Tech and Climate are two areas ripe for regional taxation - a digital tax in the tech space and a carbon tax in the climate space. One can envision a financial transaction tax should a common banking union come to pass.

More and more we see the outlines for the 2020s to become the Decade of Europe. We may not be alone; those early bird investors, the Private Equity folks, are all over Europe. In fact, over 60% of PE deals done ytd have been outside the US, the most in 20 years.

Recent European data, from IP to factory orders to retail sales (now up Y/Y) reinforce a key Covid message: in an era where global trade is impaired (down roughly 18% Y/Y in Q2) domestic demand is key. China gets it, Europe gets it…the US doesn't seem to.

Domestic demand depends on bringing Covid-19 under control and where is it most uncontrolled? In the Americas: the US, Brazil, Mexico….

If a nation can't control the virus then domestic demand is going to suffer, the economic recovery will be subpar, demand for stimulus will be higher and the FX will be lower… note the dollar swoon.

We expect this Covid formula: virus control > domestic demand recovery > better financial asset performance > non US equity to continue to manifest itself thru YE and into 2021.

We also note that risk assets have taken as given several key concerns: an imminent US stimulus package, a vaccine by YE, a Biden Presidency & a non kinetic US - China struggle (read Kevin Rudd's Foreign Affairs piece if you want to worry about the latter).

While we remain positive on risk assets and note that cyclical sectors, sniffing a synchronized global recovery, are starting to break out of the 2 month range they have been in, we also recognize that there is V little room for anything to go wrong.

Net - net, it is August. Bond yields breaking lower & stocks breaking higher - both can't be right; a continued up move in equities will serve to mess with the most folks.

TGIF Everyone!

TPW Investment Management Team

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Happy Friday,

Lots of press about horrible Q2 GDP #s, few headlines about BTE Q2 global earnings.

Neither means much - if 2020 has taught us anything it's that we must focus forward to keep up with CV19 speed and the algos. Heck, even back in the old days summer end meant focusing on the year ahead.

Dr. Fauci was quoted this week saying it's “reasonable” to expect a working vaccine by YE - that's the speed of science in the Age of Covid, augmented by Moderna & Pfizer both announcing 30k person Phase 3 trials with October review dates.

As we enter August two things come to mind - time to get ready for school (if you have kids) and poor seasonality for equities.

We noted in last week’s Musings (link) how the lines of distinction between Europe and Asia’s handling of CV19 vs the US were becoming more and more self-evident. School is one example - many European countries have schools in session now yet the US can't figure out when, how or even if schools should reopen.

On the comparative governance front, the US Senate decision to break for a long weekend while numerous CV19 benefits expire says it all - especially compared to the 27 EU Heads of State who went deep into overtime to get agreement on the Joint Recovery Fund.

JPM notes it now expects a much stronger 2021 economic recovery in Europe with a 6%+ GDP forecast vs roughly 2.5% for the US. Better governance, better growth, it's Papa Johns (no sorry) it's the EU!

FX traders have cottoned on to this with the USD having its worst month in a decade; same for fixed income traders as much of the UST curve hits new lows in yields. Maybe that's why equities don't seem to have gotten the memo.

Speaking of FI, did you know that over 85% of the global investable bond market yields less than 2% while the globe’s pile of negative yielding debt now exceeds $15T?

Earnings season has come in BTE with tech demonstrating what winning in the Age of Covid looks like. Beats are high on both sides of the Atlantic; more importantly revisions are stabilizing across 2020, 2021 and 2022. Earnings have bottomed.

Going forward the focus should be on execution - at all levels: Govt, Corporate, Society.

Asia and Europe have demonstrated that getting the public health process right leads to better economic outcomes. We expect this recognition (not yet agreed upon in the US) to manifest in stronger, more robust 2H economic recovery outside the US, reinforcing the Cyclical/Value nature of the ex US DM equity markets. Europe’s equity pullback provides a nice entry point.

Covid 19 has put global trade on its back legs, signaling the importance of domestic demand which in turn reinforces the need for robust CV19 response otherwise that service sector leverage turns on itself - this is a 2H risk in the US.

The botched nature of the US response calls into question the sustainability of its economic rebound, likely capping equity upside as the US rotation to Cyclical and Value is blunted, flattening the yield curve and pushing leadership back to an overrowned tech sector.

As we enter the worst seasonal period for equities, also one of worst for UST (and historically one of the best for the VIX, no surprise, and gold) we expect a tug of war in risk assets: on the plus side, speed of science as noted above, earnings bottom, strong likelihood of a DC deal, an ebbing of US CV19 cases, hospitalizations & deaths against an unpredictable White House & rising US political risk, chaotic school reopenings, economic disappointment & poor seasonality. Perversely, any tightening in the race for the WH is likely to be negative for risk.

We remain positively disposed to risk assets with a preference for non US DM equity, China, ex US tech, Cyclicals/Value, metals/miners & yield plays including preferreds, EM debt, TIPs & US HY.

In the very near term the USD is oversold and due for a bounce while gold is overbought - the rally in UST prices corresponds to rising US CV19 cases - as cases rollover, look for bond prices to fall & rates to back up.

TGIF!

TPW Investment Management Team

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Happy Friday,

Jay was on Bloomberg Radio Tuesday evening discussing recent market action in a nice 7 minute clip. RECORDING

The lines are being drawn for a period, perhaps multi-year, of ROW equity outperformance vs the US. USD weakness is likely to provide a key tailwind.

Our Tri Polar World (TPW) framework: regional deepening in Asia, Europe & the Americas driving the geo economic & geo political landscape, highlights several key issues.

First is the continued poor relative US response to Covid -19, a poor response that is building on itself as the White House (apparently) gives up, testing & tracing remains inadequate & the outlook for school openings & economic recovery in the coming months appears increasingly subpar.

This poor US response extends to the discussions around a 5th stimulus program as the WH and the Republican Party bicker while House Democrats await with their $3T proposal passed several months ago. As hard as it is to believe, press reports suggest the WH wants to cut funding for the CDC and testing/tracing.

Compare this US response with Europe’s agreement on a Joint Recovery Fund that beat expectations, involves unprecedented & significant joint debt issuance, a dovetailed approach with Europe’s Green Deal and a 7 year budget that sets the stage for Europe to deepen its integration and solidify the Euro’s global reserve currency role over the coming years.

The distinction between US fumbling and BTE European integration reinforces our view that the 2020s could be Europe’s Decade.

Beyond the sharpening distinction between the US and Europe/Asia on reopening & economic recovery (note China’s 3% Q2 GDP growth or Europe’s much better than forecast July PMIs) there is US political risk which seems to be rising by the day.

President Trump’s handling of the virus has led to tanking poll numbers, putting Senate control in play. This assures an ugly campaign season ahead with Trump deciding to run a dual campaign bashing China on the one hand and claiming to be the domestic law & order candidate on the other. With Biden proving immune to the Trump playbook, both strategies are deflection plays to avoid Covid-19.

The rapid deterioration of US - China relations benefits no one; a War of Words is one thing but dual consulate closings is more reflective of a new Cold War & neither economy is strong enough for that. US antipathy to China has meant that becoming self-reliant in key technologies is THE driving force in Chinese economic policy. How that helps America is unclear.

This week’s news that Ant Financial will list in both HK and Shanghai and NOT in NYC is another own goal for the Trump Admin - how that helps the US maintaining global financial leadership escapes me.

The domestic, law & order part of Trump’s campaign is already setting cities & states against the President raising concerns about Presidential overreach and Constitutional concerns while deepening divisions within the country. How that helps the US do a better job on Covid -19 is unclear.

Talk is already shifting to what a Biden Presidency might mean and how anticipated Republican obstructionism will place the US further and further behind a more rapidly recovering & integrating Europe and a growing Asian ecosystem led by China and increasingly inhospitable to US companies.

Thus we come to the USD which has been the globe’s FX of choice for close to a decade. Now anywhere from 15-20% overvalued, down in 10 of the past 11 trading sessions, the dollar could be in for a multi-year decline.

Exploding fiscal deficits, collapsing rate premiums, broad topping technicals, light non $ positioning coupled with the longer term and more strategic issues noted above suggest dollar weakness could be the tail that wags the asset allocation dog - providing quite the tailwind for precious metals & non US asset outperformance.

With August almost upon us, seasonality starts to rear its ugly head - SPY weakness could be required to remind DC why more stimulus is needed. A possible double top in tech could reinforce this potential weakness while setting the stage for a shift from Growth to Value and Cyclicals.

While US based investors are not really welcome in Europe or Asia, thanks to that US Covid -19 response, they would do well to dust off their atlases and get familiar with what's happening abroad.

Stay cool my friends!

TPW Investment Management Team

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Happy Friday,

That's the message that blinks on and off outside Aspen city limits: stay safe, wear a mask indoors so Aspen can stay open. Seems reasonable yet much of America has failed to implement it.

As I noted on BTV's The Open show Wednesday (LINK - on from min 34 to 42), our Tri Polar world construct suggests the US and the Americas are badly underperforming Europe & Asia in three main areas: the US’s uniquely poor response to the virus, its chaotic reopening which risks impending the economic recovery effort while US Presidential politics ensure a rollercoaster Summer & Fall.

Europe & Asia don't face any of these issues: Asia, 1st in Covid19 and 1st out, is returning to growth led by China with Q2 GDP growth of 3.2% y/y. Europe’s reopening process has been smooth and both regions have demonstrated the ability to handle localized outbreaks (Beijing, Berlin). The supply side clearly has bounced back faster than demand but sustained reopening should alleviate that imbalance.

It may be that it's not Covid-19 alone that ends the US financial asset dominance of the past decade but the combo of the virus and the dismal US response to it that does the trick. ACWX is outperforming the SPY over the past few months while the USD weakens. Dollar weakness would be a great tailwind for non US asset performance.

The USD could be the tail that wags the asset allocation dog. The US fascination with sanctions is leading the Chinese to push for greater RMB usage abroad - watch the China - Iran deal to see if Iranian oil is priced in $ or RMB. Note the Euro at a 4 month high vs the $ while China’s Yuan holds at 7 or stronger notwithstanding all the US negative verbiage. We remain of the view that US - China relations will be a War of Words not a new Cold War.

Economic recoveries across Europe and Asia reinforce the Value/Cyclical tilt many equity markets in both regions offer. The recent tech surge in US equity reflects a lack of confidence in the US economic recovery while proving the point that a broadening out to include Value & Cyclical sectors will be necessary for new highs.

We expect the US to be an OK absolute equity market thru YE but a poor relative performer vs Europe & Asia. That in turn is the best environment for sustained non US outperformance.

The focus in coming weeks will be on Earnings, Stimulus and Science to drive asset values. The US earnings season is off to a good start with the big banks leading the way; we continue to like banks on both sides of the Atlantic… in Europe, peripheral bonds have soared in value - EU banks own a boatload but to date bank stocks have not reflected any of that appreciation.

Stimulus remains necessary, especially in the US given the reopening worries noted above. With Trump trailing badly and talk of a Democratic Blue Wave in Nov expect Phase 4 shortly. This weekend European leaders meet in person for the first time in months to determine the shape of the Joint Recovery Fund… it may be too much to hope for but significant issuance of EU sovereign debt would be smart from a LT Euro POV. As noted before the decade of the 2020s could well be the Decade of Europe.

We have often spoken of speed as Covid-19’s signature: speed of spread, of policy response, market response and now science response. The coming week could bring the first results of the Oxford/Astra joint vaccine effort; it seems increasingly likely that a vaccine could be developed before YE. As we have noted, fighting the Fed is one thing, fighting the global scientific community + the Fed + fiscal policy makers is not a smart nor sustainable move.

Ending on a good note it looks as if the recent wave of new cases in the South and SW of the US is beginning to ebb with week over week case growth now around 12% vs 24% a week ago and 40% in late June. Hospitalizations appear to have peaked and deaths should follow. The NY Fed Q3 GDP nowcast is signalling 10% GDP GROWTH….

Stay Frosty my friends!

TPW Investment Management Team

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Happy Friday,

And what a first half it was - too many records set, broken and set again to even mention. This one caught my eye though: according to BofA, Q2 is likely to be the best Q in 50 years for the S&P and best in 45 yrs for Global stocks. Does it feel that way to you? No, not to us either.

As noted in our June Monthly (link) some back and fill in risk assets makes sense - it's not a bad thing for time to slow a bit and allow policy makers & investors alike to gather themselves & prep for the 2nd H.

Hopefully these Musings will help. Grab some hydration & let’s reset.

How countries handle CV19 will likely be a key 2nd H driver to asset returns. The Americas (US, Brazil, Mexico, etc.) appear to be having its 2nd CV19 wave before the first one is over. The case levels, deaths and overall shambolic response to CV19 in the Americas is by far the worst in the Tri Polar World. Asia and Europe have handled CV19 so much better, even though they were ahead in the Covid queue.

Remember fears that China was facing a 2nd wave with its Beijing outbreak? Well two weeks later and it's under control, as are similar small clusters in SK, Germany etc. There is a playbook for this - sadly, the Americas can't be bothered to even read it let alone implement it. ROW is outperforming the US on CV19 & is starting to do the same in stocks (ACWX vs SPY).

Here’s the Q: Will this differentiated response be sufficient to catalyze a sustained, cross asset leadership change from the US to ROW with its more Cyclical and Value tilts? Will the USD roll over, will UST sell off? Watch the banks - US regulatory worries a buy opportunity - expect strong Q2 E. EU bank lending is up 7% y/y (best in over a decade) while broad money growth continues to power ahead, up 9% y/y.

Beyond the worst Covid response of any advanced country, the US offers growing political risk as it enters election season & anti-competitive strategies like shutting down work visa approvals. Of course this is offset by plenty of great tech companies but doesn't everyone already own those?

And who owns the Cyclical/Value segments? According to Morgan Stanley not many investors, with ownership levels near multi year lows. So if investors own Tech bc CV19 is accelerating digitalization (and it is) and no one owns the other stuff then how much downside to stocks is there likely to be?

With all assets moving roughly in lockstep since late February the 2nd H is likely to bring some distinction across and within asset classes. One already sees it in sell side research with JPM arguing the Value trade is already over while MS says it’s really yet to begin. I lean towards the old Firm.

With most assets range trading, now is the time to spend thinking through which way the ranges will break & when. Some things are breaking out: gold & gold miners, bio tech, others: financials, Dr. Copper, BUNDS, USD are worth watching closely. Will we get an inflation scare as demand runs into a disjointed supply chain?

One wonders if the 2H worries: 2nd CV wave, US political risk are being discounted now given daily record cases in the US leading to paused reopenings coupled with polls coalescing around a likely Trump loss and possible Dem sweep come November. Speed is Covid-19’s signature - a sped up discounting process fits.

JPM hi frequency data suggests global economic activity is 80% back to pre Covid levels… we continue to think investors are protected, either recovery continues or more stimulus will be made available… Republicans have been hesitant to support more stimulus but recent polling data (58% - new high - disapprove of Trump’s CV19 handling) is likely to change that. EU and Japan stimulus matches or exceeds that of the US.

The next few months are likely to be less volatile than the past Q; history suggests that strong Qs are followed by more upside and we expect that to be the case here. The Fall brings poor seasonality, US elections & for the optimists, perhaps the first batches of a Covid-19 vaccine… note that biotech breakout.

Closer to home, NYC reopens for indoor dining July 6th…hip, hip, hooray! Our neighborhood walk-a-rounds suggest outdoor dining is a hit.

Please note we will be on vacation the next two weeks; the next Musings will be mid-July.

Ok, lets get out there & WIN that 2nd H!

TPW Investment Management Team

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Happy Friday,

Speed remains the Covid-19 Age signature… speed that on some days can be dizzying - even for a grizzled vet like me. Having a process, a POV is key to staying upright & not succumbing to vertigo.

We noted last week that risk asset prices were extended - the Robinhood bros were making news and all seemed well - then boom, stocks sold off 4 days in a row, longest since mid-March, capped by yesterday's sell fest - Covid speed.

Our read? The pullback is a good thing - as new bull markets develop, signs of speculation, sharp up moves, followed by pullbacks are a sign of investors aligning their expectations of the future with current price levels. Today, machine led markets trade almost immediately to pain points as demonstrated by yesterday's fall right to SPY 3k support (back to levels seen 2 weeks ago) - like bad tasting medicine - it's healthy.

Buy the dips; 6% down days are good days to build positions in the Cyclical, Value, non US, Credit, Comm, spaces.

This week’s take home point? Today's non US mkt response is another tell - a tell that market leadership is moving away from the US to ROW… a one day, 6% pullback in US equity markets and Asia falls small and Europe trades up? No USD uptick? Hmmm.

The US chickens could be coming home to roost as lax decision marking around reopenings lead to case surges and more importantly sharp rises in hospitalizations in several states. The latter is likely to lead to some reimposed restrictions which will in turn, sharpen the distinction between the chaotic US response to Covid -19 & that of Germany or Japan for example.

Forward looking markets are focused on the reopening process & the policy support for such; the risk of renewed shutdowns are a principal market risk that increasingly appears to reside mainly in the US.

Treasury Sec. Mnuchin made it clear there will not be a national shutdown, even with a true 2nd wave (current situation is not that) so it's worth noting that the states showing worst case surges make up roughly 20% of the US economy. Reopenings will continue in much of the country as will fiscal support (Mnuchin’s other message). Thus the US is likely to lag not collapse again.

The longest US expansion (128 months) ended in February to be replaced by perhaps the shortest recession ever (Feb - May)... that is Covid speed. The last several recessions lasted close to a year. JPM expects US Q3 GDP to be up 30% annualized.

In the months ahead we expect a large scale return of workers & a demand recovery that strains an upended supply chain and creates a whiff of inflation. Inventories are V low across both wholesale & retail segments, a legacy of the US - China trade war. The surprise could be demand that is much stronger, much faster than expected. BofA reports that 1st week June credit card spending fell only 6% vs yr ago levels vs down 20%+ just 2 months ago.

Notwithstanding the UST rally of the past week or so, the direction is higher rates, back towards our 1% target and likely towards1.25% - 1.5% as we enter Fall.

This suggests plenty of room and support for the Rotation Trade to continue as investors remain quite UW and last week’s big up move reflected short covering rather than true buying.

TGIF!

TPW Investment Management Team

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Happy Friday,

Wow, what a week - been a tough one here in NYC but we are optimists so let's look on the bright side: NYC had zero CV19 deaths mid week - 1st time since March 12th - while the 1% of protestors doing gratuitous looting have been subdued - both bring hope that the greatest city in the world, supine Monday night, can rise & conquer anything thrown at it. Phase One reopen starts Monday.

Last week’s take home point: we are in a new bull market. It didn't take long for those words to ring out as SPY capped its best 50 day stretch EVER with volumes popping, VIX collapsing and the Rotation trade leading the way.

This week’s take home point: the Rotation trade - in regions, sectors & styles - is in its infancy. It could take markets to new ATHs. Yes, new ATHs. In the very near term equities are overbought so Buy the Dips.

The BTE US May Jobs #s cement the turn to Cyclicals from Defensives, from Tech Growth ( now source of cash) to Value and from the US and USD to ROW (in our case primarily DM x US).

We have noted the self-reinforcing nature of the rotation trade as those who missed the bottom determined they had not and would not miss the rotation trade. The Jobs data & reopenings could prompt an asset allocation shift from bonds to stocks - as the 10 yr blows out towards our 1% target & the 30 yr starts to approach 2% the yield curve steepens, banks make money and the rotation trade gets a tailwind.

One does not want to be UW Banks - on either side of the Atlantic. JPM expects Q2 trading revenues to be up 50% Y/Y. US bank EPS is likely to be better than expected. EU banks, left for dead, have staged a big time recovery; MS notes they trade at a 27% discount to FV.

Meanwhile, European policy makers from the ECB, to the EC to Mrs. Merkel have surprised to the upside & brought the Rolling Thunder. Bunds react (on the way to zero?) and help spark the UST selloff which then is magnified by the jobs #. The case for long duration BUNDS/USTs looks less appealing by the day; they are massively over owned & could provide plenty of fuel for more equity fire in both the US and Europe. Give them a whiff of inflation and look out.

Looking for an uncrowded place to invest some cash - look no further than European Equity where BofA notes the first inflow in 8 weeks, a paltry $600M - yes $600M in a world of Trillions. BofA also notes US equity OW biggest in five years while EU equity UW largest in eight years.

We have been positive and OW equity since April with a Rotation (Cyclical/Value) and DM ex US focus. The action now is in Bonds and FX with the USD signaling real cracks in the American Dream. In the very near term, cross asset moves are extended but the change in direction is clear.

We have wondered for several months whether Covid19 would be able to upend the USD and US financial asset dominance like it has with everything else. It seems like the combo of the botched US virus response & the lack of leadership displayed during the past week of protest may be sufficient catalysts.

Protests reinforce the shift to Big Govt & wealth distribution that was evident from CV19 and increase the likelihood of a Democratic sweep in November. This suggests the coming election season could be among the nastiest and most dangerous in modern American history. For an offshore investor OW the US or an overweight domestic investor rebalancing into Europe & Japan makes sense.

A whole crop of US investors may need to learn about the ROW for the first time in their careers. DM x US markets are ahead of the US in reopening, are bringing the policy thunder on a regular basis, are much cheaper and completely under owned. This trade too is in its infancy.

The Euro rally is the best since 2011, USD has just had its worst two week span in 8 years against both DM and EM FX with DXY rolling over & breaking support. A$/Y breaking out - a VG proxy for global growth.

It's probably worth spending some thinking time this weekend on what could derail this freight train: botched reopenings, CV19 outbreaks, poor Q2 EPS, seasonals (August - Oct worst seasonal period)?

The investment firmament is shifting under our feet - the rotation has legs - it is early days.

Be on the right side of history & be well.

TGIF indeed!

TPW Investment Management Team

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Happy Friday,

Today’s Musings come straight from Jay’s notes from a fun visit with Jon Ferro on BTV's The Open this morning - talking reflation & new bull market.

Link to full show (Jay gets on at minute 28).

NOTES:

SPY breaks above 3k and clears technical hurdles - blue sky above. Question is whether it draws in buyers? Surveys (BofA) suggest bearish sentiment remains dominant: 80% see U or W recovery, 70% see bear mkt, BofA Bull/Bear sentiment indicator pinned at zero - uber bearish.

I think we are in a new bull market - as one of my most experienced and best buddies said to me today – “I want to leave you with one point - we are in a new bull market.”

While not a technician, I respect & incorporate such, especially in fast moving markets. Technicals increasingly suggest new bull with unequivocally strong breadth thrust as 90% of SPY above 50 dma, the rally off the lows has retraced 66% of drop, moves above 61% typically suggest new bull and perhaps most importantly the shift in leadership from Tech to Cyclical - Value, Small Caps.

The Druckenmiller - Tepper equity hate fest a few weeks ago was the tell. It led to a quick 6% pullback - the S&P then ripped roughly 12% led by Cyclical- Value segments… when old leadership takes a break & new leadership emerges that tends to be a new bull market. Also suggests lots of left behind $ ready to come in on any pullbacks.

US Growth - Value spread remains at near record wides - how will it resolve? Does Tech crash or does the market broaden into Value - Cyclicals and go higher? Recovery supports the bull thesis while US tech is at risk in an election year as the Trump Twitter fight suggests. Hating on Big Tech and China represent the only two bipartisan POV in DC.

Reflation watch: CRB index breaking out, raw material prices skyrocketing: gasoline, oil, lumber up 81%, 62% and 45% off lows. Unlike in 2008-9, US consumer in good health with housing and stock market wealth intact, new home sales are already recovering while inventory is low, esp vs 09/10.

Today’s Consumer spending headline is a classic example of Bear Market headline vs Bull Market insight. Headline: US consumer spending plunges most ever; insight, US consumer income up 10% m/m vs -6% forecast while savings rate hits unbelievable 33%. Economists have no idea how to forecast policy support because they have never seen it.

The surprise will be US consumer demand recovering much faster than expected; BofA survey of 1st US states reopening reports restaurant spend already at 70% of Feb average. UPS’s move to peak pricing, 1st time ever outside for XMAS season, illustrates how better than expected (BTE) demand & supply chain disruption ( Covid-19, China) could lead to some inflationary pressures when none are expected, pushing up rates and helping Financials.

One thing Covid-19 has not yet upended - USD and US financial asset dominance - will it continue? Signs of non US starting to OP. Look at Japan: lift natl emergency and double stimulus in same week, cheapest major DM at 14.5x forward PE vs US at 21.5x, EWJ (Japan ETF) breaks above 200dmav, cash rich, and cyclical play. In Europe, the Joint Recovery Fund tied into the Green Deal sets stage for Europe (15x forward) to recover. Germany, Europe’s economic engine, is starting to recover with retail sales coming in BTE & Merkel stimulating big time (EWG -Germany ETF, up 11% on month, approaching 200d).

US - China tensions escalate with HK troubles: 4 unknowns with national security law: what it will look like (China drafting now), when it will take effect, how it will be enforced and what will the US response be? Speed/ferocity of US response driven mainly by US domestic political considerations. Lots of smoke yes, fire no - neither side can afford more economic weakness. Cold War no, War of Words yes (benefits both Xi and Trump).

The US better hope it's not a new Cold War bc it is on its own here - note EU response (sanctions not the answer) note pan Asia response - crickets. Market point: China = more than 1/3 broad EM equity index. Watch HK banks for capital flight indicators. Regarding non-US equity allocation EAFE beats EM, especially given DM policy flex (witness EU/Japan in past week) vs lack thereof in EM.

Risks remain: Covid-19 clusters turn to national outbreaks, US - China devolves into more trade tariffs (though been there done that), US reopening proves more haphazard than response to date...Buy Dips.

Final Covid-19 thoughts: virus serves to accelerate Tri Polar World process of regional integration as supply chains regionalize & capital flows stay closer to home. Covid-19 “prevention paradox” playing out: lockdown success leads to complaints about too slow reopening.

Feels that way in NYC for sure…

TGIF - what short week - this was loooong.

TPW Investment Management Team

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Happy Friday,

One group that didn't stay home were the Chinese whose May Day vacation period included over 100M domestic trips. Why is that important? Because several weeks have passed with no outbreaks, suggesting China can continue to comfortably open its domestic economy.

China’s Two Sessions National Congress also just opened, in sharp contrast to the US House which just allowed proxy voting for the 1st time in its history. Expect China to announce additional stimulus though perhaps not a formal growth target which seems smart.

As the US ups its anti-China rhetoric one group stands silent - no prizes for guessing it’s the US corporate sector - companies realize that exiting China is a nonstarter, even more so than breaking up NAFTA. Trivium, a China focused research shop, notes that their conversations with foreign companies do NOT suggest a mass run for the exits.

Don't be put off by the heated US - China rhetoric - neither can afford concrete action that further adds to economic weakness.

We noted in our 2H Outlook piece (link) that the one thing Covid-19 has not yet upended is US equity & USD leadership. We also noted that speed is Covid-19’s signature; we expect that to continue in two areas. First, in terms of the speed of science and vaccine development and second in terms of how fast reflation becomes part of the market’s lexicon. Investor positioning is offsides for both.

As the reopening queue expands from Asia to Europe and now to all 50 US states we note that the 1st in, 1st out economies, especially those who handled Covid-19 best, are starting to provide global equity leadership. Still early but China, S Korea, Denmark, Germany are all outperforming over the past month.

We saw the first glimmers of US reflation buying in the Cyclical and Value segments off the bottom of last week’s near 5% pullback. Small Caps, Energy, Miners, Banks led the way back up while Tech lagged. Note Europe & Asia are Cyclical/Value plays. EU Recovery Fund talk suggests glimmers of a turn there as well.

A friend and former MS colleague, Jordi Visser, CIO at Weiss, is on top of the Reflation Case & just put out a VG webinar on his views which dovetail with my own. Do yourself a favor; find and watch it. We laid out our thoughts on the matter here (Webinar link).

Unprecedented liquidity, supply chain disruption, big jumps in delivery times, consumer inflation expectations picking up - Reflation seeds are being sown & very, very few are positioned properly. AAII net bearish is at 09 lows, 10 yr UST at .7%.

Investors should note that they are protected - a V shaped recovery will bring in more buyers, especially once SPY clears the 200dmav (2995) while absent a V, additional stimulus will be forthcoming - after all, it's an election year. History tells us that once economies bottom (and we have bottomed) meaningful equity losses are unlikely.

Spare a thought for the Search for Yield - it remains well and truly in place. Take a look at EMB, the EM $ debt instrument, up over 5% in the past month. US HY remains attractive while on the equity side Japan’s cash rich companies offer a solid yield pickup vs the US.

One fun fact about Japan: it might be the best place in the world to be looking for a job: today, there are 40% more vacancies than job seekers….the country’s lousy demographics have become a positive!

On that cheery note, TGIF, enjoy the long weekend and if you go to the beach be sure to practice social distancing!

TPW Investment Management Team

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Happy Friday,

Many have noted that the bond market is not confirming the sharp equity rally. What if it's about to? On Bloomberg earlier this week with Jon Ferro (Link) who noted we might be early on this non consensus call.

Oil has bottomed (noted 2 weeks ago), global economic activity too (today's UER in rear view), re openings occur without Covid-19 outbreaks, BofA notes 80% foresee U/W, headlines scream deflation.

Forthcoming UST supply will be huge & focused on the long end as the Treasury reintroduces a 20 yr bond. Next week’s $96B of long dated supply will give a signal.

Fed pins the short end & even if Fed Futures forecast of negative rates is wrong (thru Jan 22) & it will be wrong, further YC steepening seems likely. A 1% 10 yr doesn't seem like too much of a stretch, does it?

What are the Cross Asset implications? More support for equities, even up here at 2900, helps Financials which helps the Value Factor & Cyclical sectors catch a bid which in turn helps the equity market advance broaden out. Tech has been a huge winner from collapse in long rates as it supports ever higher valuations on future CF. That prop may pop. Recall our long standing focus on possible new leadership? Pay attn here - we remain with a Tech - Value Bar bell.

Commodities should do well - still down 40% ytd. The USD might weaken - already showing signs - A$ strong last month, A$/Yen cross threatening to break out (global growth indicator). $/Y down 5 weeks in a row - longest losing streak in a decade. Good for Gold/miners.

Our 2020 Outlook, written last December, was titled: Reflation 2020. It may still turn out right. China’s reopening is picking up steam: April car deliveries to dealers up Y/Y, Disney Shanghai reopening with tx sold out in minutes (and yet the US can't decide if it will have Fall football season - ugh).

Oil bottom, broad commodity price bottom, meat shortages (US wholesale beef prices +100% y/y), supply chain interruptions, US - China trade tiff, global money spigot turned full on… who's to say inflation won't return - certainly not me (TIPs).

What else? Brazil, my old stomping grounds (launched a Brazil Fund way, way, way back in the day) sees its FX blow out… Do you know what LatAM equity represents as % of ACWI? Blow your mind: less than 1%... yes less than 1%. Wait for MOF Guedes to make his move before stepping in.

Reopenings are key: No 2nd waves/outbreaks in China, Taiwan, Denmark, Austria, Germany. Schools reopening, manufacturers up & running. Watch next 2 weeks for any virus fallout from China Labor Day vacations (115M domestic tourist trips); Beijing now telling its residents to STOP wearing masks outdoors.

US re opening underway in the chaotic nature which has symbolized the Trump Admin response to the entire situation. Good news: CA reopening its manufacturing base, Michigan its auto plants. Bad news: still not close to national testing - tracing levels needed; over 50% of states reopening don't meet Federal guidelines to reopen.US re opening riskiest yet.

Have thought China could be a test bed for the US as we follow in the footsteps of those ahead of us in the re-opening queue but starting to think that's not right - China has stomped out Covid-19 almost completely with only a handful of new cases every day… US cases still well over 20k PER DAY.. China can reopen Shanghai Disney & have thousands of folks there. Doing the same in the US seems foolhardy.

The Tri Polar World implications of Covid-19 continue to manifest: from supply chain regionalization to travel- tourist bubbles ( China - SK, Aussie-NZ) and beyond. Our TPW framework remains robust as does our Global RIsk Nexus (GRN) work which helped identify speed in all its manifestations (with science to come) as key to understanding/investing in the Covid Age.

Stay Frosty My Friends.

TPW Investment Management

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Happy Friday,

Welcome to May - after a tortuous March decline & a rocket ship rally in April, investors enter May asking themselves that proverbial question: should they sell in May & go away?

With the S&P running into technical resistance around the 3K level (61.8% retracement, 200dma) it seems appealing & some profit taking makes sense.

But we ain’t playing checkers or even chess - we are playing speed chess with the algos where the moves come fast and furious.

Our focus is on the reopening process believing that the success or failure of such will dictate risk asset direction. The premise is simple: a failed re-opening means risk assets head south in a hurry. A successful re-openings imply higher risk asset prices as shorts cover, cash comes off the sidelines & markets broaden as Cyclicals/Value start to work.

According to BofA surveys, the betting today is on a U (52%) or W (22%) shaped recovery; only 15% expect a V. That tells one where the opportunity lies.

As I learned climbing in the High Himalayas back in the day, we want to follow in the footsteps of those in front of us, namely Asia and parts of Europe which have already reopened. In China, we note no 2nd waves of Covid-19, the production side is back almost 100% while consumer demand picks up fairly sharply. (We like China’s online voucher program - smart folks will copy it).

S Korea is reopening as are parts of Europe; Austria re-opened several weeks ago & no 2nd wave. Within a week or two much of Europe will be in some form of re-opening with companies copying policies used to re-open in China.

Various US states are also re-opening. The US re-opening seems most risky given the lack of testing capacity while case curves have not been bent to the extent most experts suggest.

From a risk asset pov, JPM has pointed out the speed of the advance has been fast relative to history though akin to past exogenous recessions. Re-opening needs to go well for risk assets to build on their recent performance.

Positives include the all in nature of the global policy response coupled with the multipolar science/tech community effort to develop biomedical responses to Covid-19. The latter could have a significant influence on consumer confidence. A bearish outlook entails fighting both the Fed & the global science community.

In addition there is tremendous liquidity coursing through the world economic system: in the US JPM notes a roughly $1T increase in money market funds & bank deposits over the past 2 months while BofA notes money market funds are closing in on $5T of assets. In Europe broad money growth is running at 7%+ y/y.

The liquidity boom includes the US savings rate which reached 13% in Q1, a 39 year high, as well as in the corporate space where April US IG issuance reached a record $250B. This suggests that as the economy opens companies & consumers will have cash to spend - the question is will they have the confidence to do so?

Amidst the market action we note the Value factor may be starting to bottom. A broader market advance will be a healthier market advance; the Cyclical/Value segments should perform as economies recover. We continue to favor a Tech/Value equity barbell.

Speaking of tech, did you note the comments from Microsoft's CEO: “two years of digital adoption in two months”. Hard to be bearish tech.

We noted the 3rd shoe dropping in last week’s Musings. Commodities remain the runt of the litter with The Economist noting that in real terms its broad commodity index is back at 1860 levels - yes, 1860! At the same time, the A$, a global growth proxy, rose 6% in April.

Two more quick points; first, the USD remains a Tall Poppy - note the collapse in shorting costs though - back to 2015 levels (we tweeted on this) and second note the Trump Admin ramping up its China attacks - for anyone thinking about broad EM equity exposure this could be a headwind given that China is likely to feature as a Trump campaign bogeyman.

As we look to learn from those ahead of us one Q really stands out, especially as a parent with school age children: how can some countries re open schools TODAY and the US can't commit to opening on campus/in person in 5 months? It just boggles the mind.

Enjoy May Day - you have labored long and hard these past few months!

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Happy Friday,

Credit imploded, stocks too and this week Oil and by extension Commodities joined the party. Guess what that means? No more shoes to drop!

Makes sense for Comm to drop fast & last (note the speed). No CB support for hard assets and Oil has been in a supply surge vs rest of Comm space cutting supply. It’s coming for Oil - watch US rig count #s today: already down 36% in a month; need another 30% to get to 2016 low.

On the + side, expect China to ramp up Fixed Asset Inv (FAI) as Pres. Xi highlights need for old (Transport, hydro, energy) and new (5G, AI, IoT) infrastructure investment. More in upcoming key Two Sessions meet, likely in late May with side benefit of signaling Covid-19 control. China stimulus estimates to date = roughly 2.5% of GDP vs 19% in the GFC aftermath > don't expect a repeat but stimulus is ramping in China.

Rolling Thunder (link) policy response continues with BOJ discussing open ended bond purchases, ECB joining Fed in buying sub IG debt for collateral, US topping up PPP plan while the EC signs off on immediate $580 B spend and discusses LT $1.5-2T plan tied to upcoming budget. Bit of a can kick but Europeans do love their football - new decision date May 6th.

We have argued that current econ data don't mean much for markets but US jobless claim rollover does reinforce the speed and up front nature of the Covid-19 sudden stop economic shock. This allows investors to look thru & discount it. A key point many struggle with.

Lot of focus on possible Italy downgrade to junk today - much less on how Sov debt issues are flying off the shelf, making YouTube food fight videos look tame. Ex A: this week’s Italian debt issue (yes same Italy) for 16 B Euros. Guess what the demand was: 100B, 6x oversubscribed… demand for yield is real people.

We remain constructive and focused forward. We like the Comm space - it's the only asset class that hasn't bounced big and its day is coming: LC energy with dividends, miners, gold.

We note S&P has been sideways for several weeks - trying to decide whether the next move is up or down. The re openings, in Europe & here in the US, will tell the tale. Next week 7 US states will end their stay at home policy even though the US lacks sufficient testing and tracing capacity. The big risk is that the US reopens, stocks rock to 3,000 and then we have a failed re opening with cases exploding and stocks sinking back toward 24-2500.

Much ink has been spilled on how Covid-19 has changed the world - never be the same etc etc. We aren’t sure but we are focused on whether it leads to new leadership in global equities… that is THE question & one worth musing over this weekend….

TGIF!

TPW Investment Management Team

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Happy Friday,

This week was the first in several where time seemed to slow back down and financial markets began to once again respect their speed limits.

Volatility is down, trading volumes have collapsed & price action has been muted across risk assets with Oil the obvious exception (time will tell if justified).

So here are four areas that would seem worth musing over.

1. Bad economic news seems to be pretty much in risk asset prices. For example, one has to respect the equity/debt price action given a doubling of US jobless claims to well over 6M. Same with PMIs, UER and other data points. It is worth noting that some regions/economies were doing pretty well pre crisis (EU Feb retail sales +3% y/y).

2. If Bad Economic News is the price, what about Good News? Good economic news remains elusive & will likely stay that way for the next month or two. Good news exists on the policy side as Rolling Thunder continues with Japanese stimulus expected next week and the US unveiling its $350B Paycheck Protection Program (PPP), moving closer to the EU labor model. Broad DM Govt backstop is in place.

3. Uncertain economic & earnings data suggests our main focus should be on the coronavirus & the longevity of aggressive social distancing. The good news is that the Italian case curve has clearly bent & NYC’s appears imminent; our NYC mantra: “empty is good, empty is good” is working. The bad news is renewed travel restrictions in Wuhan - a real worry given 2nd wave concerns.

4. Part two of our coronavirus focus should be on the coming out process - what will the economic rebound look like? Currently, China is our only guidepost & there it looks like the economy V-lined back to 80% production levels and then stabilized - for how long and why are things we will learn more about as time passes. Watch S Korea; its economic reopening is expected to begin next week.

From an investment POV, the market’s technicals would seem to be the best NT guidepost. The 20dmav for example seems to be capping many equity assets; suggesting the deleveraging puke was quickly made up by the rally. Breaking out: up or down will likely require some coronavirus clarity. Studies suggest longer term equity upside post a Q like we just had; in addition we continue to consider a leadership change.

One would think we are due some good news on the coronavirus…its Friday afternoon & Spring is coming - rest up!

TPW Investment Management Team

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Happy Friday,

So much happening, so fast, in so many different areas - how to stay on top of it all?

At TPWIM, we have created a live, internal Good News, Bad News document. Structure helps & so we tie it back to our Global Risk Nexus (GRN) work: Economics, Politics, Policy & Markets and add a Health section. Below are some thoughts - I hope they are of help. Please reach out with Qs/comments.

HEALTH:

• If references to war are any indication, then policymakers & populaces are finally taking the coronavirus seriously. China reporting no new domestic cases is the ray of sunshine. But as in Good News, Bad News, Italy's continued case expansion and the US waffle between testing and social distancing is the bad. CA lock down and positive market reaction suggests much is discounted.

ECONOMICS:

• Economists also appear to have gotten the war memo with recession calls proliferating and truly scary Q declines forecast (JPM). A week ago it was Q2 US GDP -2%, now its -14%.. UER fears were 5%, now 10% + and Mnuchin’s 20% scares everyone. China’s horrid Jan - Feb data dump set the stage for these shifts - lets hope its recovery does the same (China reportedly now 75% + back in operation). Again, much is discounted.

POLITICS:

• Big Govt is BACK. US election likely to turn on who best represents a safe pair of hands; China - US tussle for influence leaning in China’s direction as US plays catch up to virus; Europe has a huge opportunity to take big steps in safe asset creation, joint fiscal policy etc. Tri Polar World implications are significant > a story for another day.

POLICY:

• War references pour fast & furious from Pres, PM, MOF etc. Rolling Thunder indeed. Much easier to respond to public health emergencies than to bail out bankers. No global coordination but 40+ rate cuts & roughly $4T in CB balance sheet and fiscal support is a lot of firepower. How much is enough is & will remain unclear; the key is that Govts (ex China which is keeping its powder dry) will do whatever it takes, even in Germany.

MARKETS:

• Gyrations like we have witnessed across assets and geographies these past two weeks update the 1929 Crash story in ways that hit close to home. Personal story: my Grandfather was in the markets then: He got married, went on a transatlantic honeymoon cruise and returned home to find himself busted. Selling the family silver indeed.

• In 2020, we have lots of price discovery, massive, machine led, deleveraging by volatility traders, systematic managers & risk parity players leading markets from “record breaking” to “broken”. This market, structure, fund etc is “broken”, the US credit market and dare one say it, the UST market, the most liquid safe asset in the globe… dysfunctional if not broken.

• Good news is the Fed has the GFC playbook & is using it. Value players are talking up a generational opportunity. VAR players have delevered. Top down tough given EPS uncertainty; 10% off 2020 US EPS of $170 gets $150 or so which puts SPY at 2400 on 16x forward. ROW was and is cheap; Japan eq cash rich; EU banks at .4x BV.

UPSHOT:

• A lot has been priced in, policy makers are on war footing, positioning is much cleaner, family silver has been sold, starting to get our arms around the various impacts of coronavirus.

WATCH:

• Volatility (needs to stabilize/decline), hedges (need to act like hedges), correlation of one needs to come in (1 month implied SPY @ .98 mid-week). Next week: March PMIs, low 40s whisper #, Quarterly rebalancing (MS suggests $160B to buy eq). Peak (EU-US) cases remain key missing variable. Italy in focus - potential case peak in next week or so.

OPEN QUESTION:

• Will the bear market will lead to new leadership? As the health, economic, policy and market parameters stabilize then one can start to visualize the future. While today it's blurry as heck (WFH has not caused an early happy hour); a return to status quo ante seems unlikely.

Rest up, be well and hopefully find some quiet time to digest everything….

TPW Investment Management Team

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Happy Friday,

The good news? It's Friday. The bad news? It's only Friday morning.

Investors clearly not buying risk (except us) ahead of the weekend’s China PMI releases and who knows what else.

Given this week’s near unprecedented selloff one can be forgiven for thinking the world is ending, maybe bc machines are driving the train? Risk assets have given back Fall Risk Asset Rally gains & are O/S; safe havens, namely long duration UST, are very O/B.

Looking at economic data: various Fed Q1 US GDP Nowcasts (between 2-2.7%), European data flows (solid thru Feb), China reopening’s (Apple, Toyota, Starbucks), one could have a very different POV. The St. Louis Fed's Financial Stress Index is benign as is Chicago Fed’s Financial Conditions Index.

China/ Asia ex Japan best performing region, rest of world punished; sale of US Min Vol & Gold ETFs recently suggest we are in the panic phase of selling.

Headline risks from here: EU Schengen closing, US outbreaks, WHO pandemic announcement. A week ago G-20 whiffed on coronavirus with SPY close to ATHs - financial markets have once again alerted policy makers that they need to act.

Expect a meaningful policy response: growing expectation of a Fed cut, HK “helicopter money” drop, EM rate cuts, open discussion around fiscal stimulus in Germany & elsewhere. China is likely to tie its policy response to Q1 GDP release.

Risk asset direction likely determined by race between virus spread and attendant econ effects vs getting China back on stream/global policy response. Bloomberg Economics estimates China now operating at 60-70%. More cases are a given but with roughly 40 countries already affected & on high alert, big outbreaks should be contained. China could be 80-90% back by March end.

As BTV video shows we see more risk in long-dated UST at current prices than global equities and think investors should be building a buy list focused on Cyclical/Value segments. Much has been discounted. Global Econ entered the virus in broad recovery mode with Comp PMIs for Global, Advanced and EM economies all averaged over 52 in January. Q1 will be weak but expect sharp, stimulus supported pick up in 2H led by ex-US economies with more room to act.

Growing risk that ex-US recovery & growing US political risk (Super Tuesday next week while virus represents a real challenge- threat to a US Pres riding high post impeachment) could coalesce to stimulate outflows from still expensive US safe haven.

Get some rest - you deserve it!

TPW Investment Management Team

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Happy Friday,

Written or spoken word, we have it. TPWIM's POV available via an in depth ETF.com interview with Summit Roy as well as a 10 Questions in 10 Minutes MarketDesk podcast with Ben Phillips. Both feature CIO Jay Pelosky & cover a lot of ground, including current AA and top ETF holdings. Enjoy!

Lots to muse over as coronavirus concerns continue to bubble.

New virus cases in China continue to decline sharply while US Industrials report close to 100% of China plants up & running at roughly 50% capacity, expecting to ramp to 100% thru March. China stocks up roughly 4% on the week.

Growing pan Asian virus cases are rattling markets & leading to increased fiscal efforts (SK, Singapore) to offset the feared economic hit. Note Feb mtd SK exports +12% y/y, suggesting global growth pick up into virus fears.

Expect more fiscal talk at the G-20 meeting this weekend.

US rates continue to reflect safe haven bids, leading to negative real rates in the US; the last negative real rate stretch was in the 1970s… current nominal 10 yr UST levels have proven to be the bottom several times.

USD rally while rates fall and deficits expand is a little disconcerting - current DXY level marks top of recent range. Yen no longer a safe haven while growth concerns undermine Euro.

The move to Green is having unexpected effects, including turning Utilities into “Growth” stocks (ICLN anyone). That combined with the low rate revaluation boost to the Growth/tech segment (the biggest portions of ESG ETFs) have caused Growth to rally even more.

The results: YTD Growth - Value perf spread the biggest in decades. Tech valuation spread vs SPY widest since 2009 while BofA notes “full capitulation into deflation assets”.

By the way did you see the rising amount of Activism in Japan where the PE firms are circling as well as the Italian Bank M&A in Europe? Pay attn!

Speaking of Europe, JPM just noted that European Q4 EPS ex energy at +6% was better than US ex energy while February Composite PMI best in 6 months.

Net-net, we continue to expect the virus impact will be sharp & short lived; consequently, the growth rebound should be sharp as inventory rebuild could be epic, leading to many of current cross asset relationships to unwind, including an ESG whack through the Growth segment.

TGIF & and Have yourself a weekend!

TPW Investment Management Team

Journey

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