Welcome to the last Friday Musings for 2020. I have done multiple 2021 Outlook presentations over the past two weeks (attached) - here is what speaks to me.

Speed, Covid’s signature, is breaking out beyond health. The speed of the Covid response - global money, human ingenuity and technology coming together to create a vaccine in 1/10th of the normal timeframe - is going to be replicated in regards to climate and other big issues.

I am a big believer in post Covid life looking a lot like pre Covid…. Death of the Office is Dead Wrong for ex. Asia, 1st in, 1st out, suggests this is likely to be the case especially when one looks at China.

One thing that is NOT going back to pre Covid conditions: speed of change. It's like driving in a 55 mph zone and then a 65 mph one - we have shifted to a faster pace of innovation & disruption. Speed of market reaction (public & private) has also changed. Think TSLA instead of FAANGS or ICLN instead of ESGU.

Regime shifts are occurring across societies and markets. Health policy leads, followed by a melding of fiscal with monetary policy (Fed no rate hikes till 2023 provides runway). Across the Tri Polar World, climate has joined the policy top table: net zero commits by China and Japan in Asia, Europe’s Next Gen linkage of JFR & Green Deal and the incoming Biden Admin placing climate at the center of its economic policy.

Policy driven markets provide scope for thematic led investment decisions executed via ETFs - the perfect vehicle for asset allocation.

My 3 phrases for 2021: A “Global Economic BOOM” will set off a “Great Rotation” across assets, regions, countries, thematics, sectors, styles & factors that inspires a “Golden Age for Asset Allocation”.

Besides the normal stock - bond - commodity - alternative portfolio allocations, I suggest one needs to think about how one is allocated thematically, to wit: clean energy, EV, gaming, cyber, fintech, genomics, ecommerce, crypto… to name a few. Do you have exposure to these themes - do you have ENOUGH exposure?

Use pullbacks to ensure one is positioned properly.

What do you think? Does this resonate? Peering into the near future is always a challenge. Reach out if you are interested - I am looking at some model portfolios to help think through these issues.

It's been a wild year - lots to contemplate over the holidays - enjoy the downtime bc change is coming…FAST. Change is coming here at TPWIM as well - will update in the new year.

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Yesterday was a pretty interesting day on two levels: one, commodity related equities (ILF, GSG, XLE, AMLP, PICK) rose sharply while Bonds rallied (AGG, TLT); two, the IPO frenzy continued with Airbnb following Doordash into the stratosphere while Blackrock announced it was recommending a tactical equity overweight.

In the first instance someone will clearly be proven wrong (my bet is the bond market) while in the second both can be right over time but when everyone seems to be on the same (bullish) page a player as big as Blackrock just going OW now suggests there is a lot more where that came from. JPM agrees & forsees $1T in equity inflow/demand in 2021.

So much big picture stuff to cover - we are in policy driven markets: health policy rules, fiscal policy follows and monetary policy comes in third as we were reminded with yesterday’s ECB decision which elicited a few yawns in Europe and not even that here.

Policy driven markets means politicians are players and so here’s a political process primer: endless bickering on the same topics until someone screams Uncle and the deal is done, to wit: Brexit and fisheries… really? Or business liability protection in return for state and local aid in US stimulus talks - this has been the clog in the drain for months… it's amazing really. I discuss this and more on Bloomberg Radio .

Well as one learns in the high mountains, the strategy is to keep putting one foot in front of the other - in other words to keep going. Europe has done just that in agreeing to a huge $2.2T budget/JRF package while strengthening its Green Deal. It took all night but it got done. It's a HUGE deal that sets Europe up policy wise for the coming 3-5-7 years & emboldens us to repeat our view that Europe has (an ever better) chance to win the 2020s.

Oh and just in case anyone was wondering which is more important - it only left 10 minutes for EU leaders to discuss Brexit. For all but the UK, Brexit is a side issue - if there is no deal this weekend and a sell off results - I have two words for you: buy it.

Europe is the epitome of the Tri Polar World’s (TPW) one foot forward region as it seeks to become the world’s normative power (rule setter for those who don't have a poli sci degree). Asia is TPW’s consumption region: China’s DCS, the RCEP deal, a strong RMB serving as the lodestar of a regional currency bloc - as in Europe, it's all starting to take shape as China TSF expands 13% y/y while X soar 21% y/y & S Korea’s early Dec X rise 12% Y/Y on an adjusted basis. Asia leads the global economy - 1st in, 1st out.

Here in “post truth” America one wonders what the TPW case is for the Americas? In an America First age that was an easy question to answer even if you didn't like the answer. Now it's up to Joe Biden - in a way it's nothing but upside though 4 years of partisan gridlock would really set the US and Americas back relative to Asia and Europe.

Here’s a crazy idea - how about the US helping its neighbors in Latin America with the vaccine rollout? Build goodwill, let folks know the US “is back”, turn the page on the socialist rant and start to think strategically.

On the plus side the Fed did report that US household net worth (HNW) hit another record in Q3 helped by surging house and stock prices, good news for those who own one or both. It took only two quarters to recover from the Covid collapse while it took nearly 5 years for HNW to recover post GFC. We are climbing a different mountain.

Two other things that struck me this week: the lack of market reaction to the UK’s start of the global vaccination process & the brushoff markets gave to the news that the US was suing Facebook on antitrust grounds. Maybe it's fatigue, maybe it's the rush into YE, even in Covid Age, maybe it's those rocking IPOs but I gotta think the market is missing the big picture in both.

Successful vaccination processes will literally change the world - no way it's priced in. Second, there are two bipartisan issues in Washington DC today: anti China and anti tech. Tech, FANG tech anyway, is already facing the “kryptonite” of vaccines and rising rates ( someday soon); our tech focus is on Innovation & Disruption not Domination.

Hey, if you missed yesterday's 2021 Outlook webinar don't worry - it's all here , including how the Global Economic BOOM sets off the Great Rotation & unlocks a “Golden Age” for asset allocation. I come on around min 25 but the EMQQ part is also worth a listen - especially the valuation comparison between EM tech & FANG tech.

Here’s to hoping I can go to the gym on Monday and then to my Italian place for lunch indoors!

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G20 meets this weekend - remember the G20? No, well don't worry - you don't have to because it's irrelevant in the Tri Polar World unfolding before our eyes. Asia forms the world’s largest FTA, Europe integrates through its Green Deal & Joint Recovery Fund while the Americas sit back and sink into dysfunction.

It's a simple question; Is Mr. Market right to look through US political dysfunction and failure to pass stimulus or is it not? It clearly has been right to date, with the SPY up 4% over the past one month though the big action has been offshore with ACWX up almost 8% led by Europe and Japan. One should use these coming weeks to come up with one’s answer & get right sized for 2021.

BofA reports US credit card spending through Nov 14th up 6% y/y, suggesting Mr. Market is right on the stimulus Q. A strong stock market does tend to limit political spending appetites, no matter the need. A spending bill required by Dec 11th to avert a Govt shutdown is likely to create some movement though the White House actions of late suggests there is no bottom to the dysfunction level.

US political dysfunction is epic in the true sense of the word, as in never seen before as the President displays the full depth of his narcissism; the failure to initiate the transition, during the worst pandemic in 100 years, is deeply worrying & depressing.

How 77% of Republicans can say that Biden won by fraud - in an election certified as the most secure in modern history and one in which further microscopic review has turned up no evidence of fraud whatsoever- suggests America has a very deep problem with facts and truth.

The average state vote recount over the last 20 years averaged just over 400 votes changed; the largest # of changed votes was 2300… as was just verified in Georgia, recounts will not change the outcome of the election, suggesting Mr. Market is right here as well.

Perhaps most importantly, the vaccine news keeps getting better - back to back vaccine Mondays - 1st US in-home rapid Covid test approval, while Pfizer’s EUA application suggests folks could start being vaccinated before YE.

The Rotation Trade is well underway but the tug a war between back to back vaccine Mondays and the daily case count surge helps modulate the move and in doing so protects against a blow off top & supports a risk on move that can extend far longer than many think.

Yes sentiment is extended and yes some areas of the global equity market are overbought in the near term but that's ok. Flows into risk assets have been robust but keep in mind the old MMM, Money Market Mountain, now stands at well over $4T with a T.

Similarly, Tech’s slow relative turn lower reflects its LT dominance, betting against US equity/tech has been a decade long widow maker trade. This too is very supportive of a longer and healthier sectoral & geographic rotation that leads to a broader and more sustainable risk asset advance.

Speaking of tech, one interesting question is how ESG handles the Rotation? Early days of course but a quick look shows ESGU (main US ESG ETF) peaking vs IUSV (US Value) back at the beginning of Sept, at the same time XLK (Tech) peaked vs IUSV. Something to keep an eye on. There are lots of clean energy opportunities - ask anyone who owns NIO, BLNK, ICLN etc.

Good news in Europe - case counts have peaked and are slowly rolling over as lockdowns have the desired impact. JPM notes that the recent up move in EU Small/Mid Cap stocks has plenty of room to go - highlighting a 300+ stock screen with the average stock down over 40% from 52 week high even after a 20% gain the past few weeks.

That's a good reminder that the Growth/Value, Tech - FIn, Cyclical/Defensive spreads have gotten so extended that there is lots of room for further relative outperformance through YE and 2021. Do not get off the good ship Rotation too early!

As we consider 2021 some surveys have drawn interest; an MSCI poll reports strong majorities expect US equity and Tech to sharply outperform in the year ahead - I’ll take the other side of that. BofA’s well regarded FMS reports the #1 2021 trade is long EM equity, followed by long US equity - no mention of EAFE in the top 5 favorite trades - opportunity knocks!

Let's finish with a couple of cross asset points: a Brexit deal could come next week - watch the USD; DXY has bounced off the 92 level repeatedly over the past few months while hedge funds net long gold position is at a 17 month low. On the Fixed Income side the steady rise in China’s 10 yr Govt bond, now yielding 3.3%, could be the lead dog for the UST market - we have highlighted since the Spring the 1st in, 1st out, follow the leader nature of Covid… does it work for rates too? Time will tell, as it does all things.

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Happy Friday the 13th! Spooky, spooky, like the quant quake on Monday’s Pfizer vaccine news that catalyzed a Growth /Value factor reversal so extreme it should virtually never happen. But it did - like I said, spooky.

And now, just days later, the surging US Covid 19 case count coupled with an immobilized Trump Admin (immobilized other than chasing victory ghosts through the courts) have folks questioning the sustainability of the Rotation Trade kicked off by the vaccine news.

Keep calm and carry on. After several months of sideways action, equity markets have made up their minds and are going higher, appreciably higher in the months and quarters ahead. We are in a new bull market as we suggested in May.

The Rotation Trade: sector, factor, asset and geographic wise is not a 2-3 day flash in the pan. No, it is most likely the beginning of a multi year move that will cement a Value resurgence, non US equity leadership and a bear market in long duration DM Govt debt.

As we have pointed out since the Spring, the US is 3rd in the Covid line; we can see what Asia does and Europe too. Asia of course has conquered the virus and is reaping the benefit via global equity mkt leadership & a return to pretty full normalization (take a look if you are wondering what Q3 2021 will look like in the US and EU).

Europe is back in lockdown but real time mobility data suggests the lockdown is nowhere near as negative for the economy as it was last Spring. Data suggests the EU supply chain is running at 94% of capacity as borders stay open, factories and building sites too. German truck mileage (good fit with IP) is running at February levels. Finally cases are rolling over in a number of countries (Belgium, Holland, Ireland etc).

What this juxtaposition between an ever closer vaccination process and rising cases does provide is another bite at the Rotation apple. After all, do you really want to buy an instrument up 10, 15, 20% in a week with an RSI over 80? No, you do not and neither do I. So when things sell off a bit and oversold conditions get worked off then one wants to be building positions as we discussed here (TV) and here (Radio) on Bloomberg Monday night.

BofA has called “the secular low in UST bond yields” and we agree. Breaking through the .95% technical level on the 10 year and pushing 1.75% on the 30 year heralds a significant change in asset allocation in the years ahead.

Did someone say inflation? No, no one did but folks will in the coming quarters - data points of the day: single family house rents rose an average of 3.8% across 60+ US markets in Sept while the biggest single family home rental company raised its October asking rents 7.5%, the 5th increase in a row and most since 2014.

As one starts to think about 2021 one of the key Qs is how high will rates go? Bloomberg 10 yr UST YE 21 consensus is roughly 1.3%. I think it will be between 1.5-1.75% and don't expect the Fed to play YCC until it threatens 2% given the Fed’s desire for inflation.

Rising rates are important not only in terms of % allocation to bonds, hedging vehicle choice etc but also for what rising rates means for the mega cap growth stocks that have led US equities higher and now make up anywhere from 30-40%+ of the S&P.

Duration risk has risen considerably as rates have fallen; rising rates are “kryptonite” for big tech which is also firmly in the cross hairs of regulators across the Tri Polar World (TPW), from DC to Brussels and on to Shanghai.

Speaking of the TPW, one must note this weekend’s signing of Asia’s RCEP, which will be the world’s largest FTA, encompassing roughly 30% of both global GDP and population. Big W for China which will increasingly set Asian trading norms and expand Asian regional integration, linking Chinese production & SE Asian consumption. Where is the US in this epic effort one might ask? No where must be the sad reply.

Another key 2021 Question: will Growth crash or will Value rise to meet Growth? I think Value will rise to meet Growth which will be a relative underperformer in the coming quarters and years. Thus one wants to think about equal weighted rather than cap weighted index exposure ( SPY most top heavy in 45 yrs) & one wants to be overweight the non US markets rather than the US, which has been the only game in town for a decade.

One new area to consider, Latin America… long out of favor, but with a cyclical bias and perhaps most interestingly very undervalued FX. An old MS buddy, a real FX expert, did the #s recently and reported for example that Brazil’s Real is close to 50% undervalued on his work. 50% undervalued - now that covers a multitude of sins.

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Clarity cometh but it comes slow. The Blue Wave I expected failed to materialize but it didn't matter as investors were happy to trade diminished stimulus sizing for less risk of higher taxes. Expect a Biden Presidency with the Senate up in the air until January & the runoffs for the two Georgia Senate seats.The amount of pre election litigation was substantial and cleared away the likelihood of difference making post election litigation.

I covered this ground and more with Real Vision’s Ed Harrison yesterday: growing clarity across the Big 3: elections, stimulus and vaccines, the Rotation Trade, both sectoral and geographic, the onset of a bear market in long duration Sov debt and the growing appeal of deep cyclicals/oil as we approach 2021 and a global economic boom.

We also went in depth on two new thoughts regarding the Tri Polar World (TPW) thesis: the growing outlines of regional FX blocs across Asia (RMB) Europe ( Euro) and Americas (USD) as well as the role each region will play in the coming decade - hint the America's role is least clear.

What a week - from Peak Uncertainty to the most oversold US equity market on Election day since 1904 to the best voter turnout in over 100 years to the best 4 day advance for US equity since 1982.

The ROW participated too: Europe’s banks rocked while China’s RMB rose to a 2.5 yr high vs the USD & Japan’s NIkkei index closed at its highest level since 1991. Japan’s equity market is the quietest global leader in a while - up 9% in USD over the past 3 months - better than S&P, better than EM and yet no one talks about it.

Global equity leadership is quietly shifting to Asia whose success reflects its 1st in, 1st out of Covid appeal. We noted this with our Covid investing formula months ago: control virus > reopen widely > broad stock market advance > outperform. We continue to overweight Asian equity including Japan and East Asia/China.

Post election the focus shifts to US fiscal stimulus which remains a when not if question - sooner is better and there is a chance for stimulus to be tied to a new Govt spending bill that must be agreed upon by Dec 11th.

Speaking of stimulus, did anyone notice there was a Fed meeting this week? Lack of Fed focus speaks volumes about the new policy dog in town - fiscal has the lead and the leash.

NOTE: the timeline to stimulus clarity may be superseded by vaccine clarity. As every day passes we come closer to the conclusion of phase 3 trials and learning about the efficacy of vaccines. We expect such by year end if not by month end and expect financial assets to react strongly to positive or negative news.

We are about to shift from Covid speed of science to speed of delivery; we remain constructive on the potential for rapid and successful vaccine distribution, given that the most well oiled part of the global economy is the logistics and transportation segment.

Speaking of oil we have been struck by two opportunities in recent weeks: the stabilization of deep cyclicals like the airlines (even with surging case #s) versus the broad equity market and the mispricing of the oil markets should a vaccine or stimulus become apparent in coming weeks/months. Risk reward in airlines and oil seems quite compelling with SPY only points away from a new ATH.

As such that is where we have been adding to our exposure: across both equity and fixed income oil-related investments. Energy now represents only 2% of the S&P while XLE just had its lowest monthly close in 16 years. If we are correct in our view of a global economic boom in 2021 then there is no way oil trades under $40pb.

On the boom watch two data points caught the eye this week: US and Chinese service PMIs. The global production rebound is well known, though underpriced by risk assets; the service side is where one needs to focus. Best US Service PMI# in over 5 years, 2nd best Chinese Services PMI in a decade! Europe lags but expect 2nd lockdowns to have much less of a negative effect on the EU economy than the 1st round.

Add in record liquidity, continued stimulus, vaccines and we are setting up for strong 2021 global growth and the Rotation Trade both sectoral and geographic.

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On BTV yesterday morning (at 16min mark), I suggested Wednesday’s no place to hide market action might have represented peak uncertainty across the Big 3 issues of US elections, fiscal stimulus, and vaccine outlook. In addition, while positioning is light & hedging heavy, Big Tech is for sale and the rotation trade requires clarity. It could have been worse and fun fact, 91 years ago Wednesday, it was worse, far worse … for that was the original OG 1929 Black Monday which ushered in the Great Depression… don't you feel better already?

There is a reasonable possibility that we get a Wednesday type move but to the upside next week as we get clarity around the election outcome and, through that prism, on the size & timing of US fiscal stimulus. Clarity on the vaccine front should materialize in the coming weeks as well; I remain optimistic on the speed of science and the capacity of global logistics to get doses to where they need to go in the coming months & quarters.

Here are my expectations: I continue to expect a Biden Blue Wave with results by Nov 4th if not the night of the 3rd (MS sees 35% odds of the 3rd). A steady polling lead that has expanded in the past few weeks, no 3rd party to split the vote as in 2016, very few undecideds (5% vs 15% at this point 4 yrs ago), and a Covid surge that should dampen Republican turnout on Election Day support this POV as do the polls, betting markets and stock baskets.

A Blue Wave would lead to stimulus akin to the already approved House bill for roughly $2.2T and would represent the start of what I expect could be a surprisingly active and progressive Biden admin. Don’t expect Biden to be a caretaker (check out Norm Ornstein’s piece on the 1st 100 days of a possible Biden Admin). A Trump win & Republican Senate would suggest a smaller stimulus sized around the WH $1.5T proposal. A Biden win and a Republican Senate would result in gridlock, be extremely problematic for the US place in the world and near term lead to a small stimulus - think Senate leader McConnell's $500B program.

Expect to hear about Phase 3 vaccine trial results by both Pfizer and Moderna in the coming weeks; China has several Phase 3 trials underway which should report at roughly the same time. All are already producing their vaccine candidates so the ability to get 40-100 M doses distributed in the coming months and billions of doses in the coming year is V feasible (Pfizer itself expects roughly 40 M by YE and over 1B doses in 2021).

The ex Asia inability to control Covid could lead one to think rollout and vaccine distribution will be sub par - that might be too negative as the private sector is much more involved, there has been time to plan and the global logistics business is one of the most forward thinking and aggressive segments of the global economy. We have long highlighted Covid speed and now focus on the shift from speed of science to speed of delivery.

Clarity on the Big 3, coupled with record global liquidity, continued fiscal and monetary policy support & China & US consumption growth underpin our view that 2021 will be an economic growth boom year that will catalyze the global Rotation Trade (both sectoral and geographical) and capsize the great Bond Bull market. Rising rates & vaccine = Tech “kryptonite”.

Our first in Covid, first out focus and our Covid investing formula ( control virus > reopen economy > broader stock market > outperformance) continue to work V well. Asia has far outperformed on its Covid response, its economic recovery and its financial asset performance & is breaking out vs the S&P. Ant FInancial’s Shanghai/HK based, record IPO, suggests a new boss in town.

Europe has been the portfolio problem child of late - we think current levels represent a great entry point; stocks O/S, banks are back to levels of a month ago ( European Banks a “Screaming Buy") even though Q3 results were better than expected and there is a growing sense of some dividend relief this year. Partial lockdowns of limited duration to save Christmas are not the same as full lockdowns of the Spring but EU stocks are back to late Spring levels. Deaths, hospitalizations, mobility indicators are all much better than Spring levels as well.

Levels are important in such markets: ACWI, ACWX, SPY all above 200d supports, if we are wrong 3150 is an important support for S&P. We remain positioned for the Rotation Trade: OW equity, focus on Cyclical/Value, SC in US, OW non US DM for cyclical exposure in Japan and Europe. OW East Asia and China in EM. Very UW long duration Sov debt, OW Credit incl US HY, EM $ debt, Pref, adding to RE. OW Commodities across metals both precious and base, miners, clean energy and building a position in oil. If 2021 is a boom year Brent will most definitely not be trading at $36 pb.

Enjoy this Youtube interview hosted Thursday by Roberto Attuch of Omninvest, an independent research platform in Brazil - a country near and dear to my heart. It's full length (hour) & I expand on all of the above plus more.

A cold NYC rain is falling & winter is coming, but so is clarity - I’ll take that trade.

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Rotation Trade Investors might not need Claritin but could sure use clarity… on the Big 3 of fiscal stimulus, US electoral outcomes, and Covid vaccines. Absence of such = wishy-washy trading. We expect such clarity in the coming 3-6 weeks & note only 12 trading days until the US elections...use weakness to add to risk assets.

Austerity - it's so 1990s… even the IMF now says Govts should spend more money; the problem is fiscal policy requires political compromise and that is lacking (on both sides of the Atlantic).

DC fiscal follies continue; the key point is that fiscal stimulus is a when not if question. Blue Wave = big fiscal, Biden Presidency with Republican Senate = much less fiscal (note Senate Republicans already in obstruction mode with their own President), Trump re-election & Democratic House = medium stimulus given Senate Rep.

There will be stimulus; there will also be US elections and an outcome, soon. Early voting is up 500% vs 2016 & favors Democrats. Expect an Election Night outcome (latest next day) as a Biden landslide remains the most likely outcome (Predictit 58% Blue Wave). Florida remains key as does Senate control. The authoritative Cook Political Report this week declared Democrats to be “the clear favorite to flip control of the Senate”.

Speed bumps pocketed the vaccine highway as several trials announced voluntary and completely normal pauses, resulting in some risk asset indigestion. Regardless, both Pfizer & Moderna’s Phase 3 trial results are expected in the next month or so. That’s Covid speed of science.

Rising case counts, especially in Europe, remain a worry, with European equity selling off as Covid control measures dampen the re-opening trade. Note however that EU hospitalizations and death rates are down sharply from Spring levels (WHO reports death rates 5x lower) and real-time mobility data is nowhere near as negative as the headlines.

Yet it's clear that Europe, with its cyclical equity bias, needs clarity on the vaccine & perhaps US stimulus, to move appreciably higher. Could European equity turn out to be the biggest beneficiary of a US Blue Wave? Keep in mind that vaccine/rising rates = Tech “kryptonite”.

Tech btw, is also struggling to get above its early Sept highs (QQQs), and with regulators on both sides of the Atlantic looking to slow the tech train down, it's one more wrinkle in the Tech forever story. US Regulatory pressure is likely regardless of who wins in November.

Technical action remains important in range trading markets. This week’s lack of equity follow thru on the back of the best week for stocks in three months (breadth thrusts, 15% of SPY hit new 52 week highs Friday) clarifies that a vaccine or stimulus will be needed to further jumpstart what has been a stealth Rotation Trade.

Said Rotation Trade pressed up against some limits recently and was rejected. Rates remain the fulcrum of the Rotation Trade and the Financials/Tech split. The breakdown in long-dated UST (TLT) was arrested at 200d support while the breakout of US Financials (XLF) was halted, though not reversed after good results were poorly received. Liked yesterday’s action though.

In Europe, BUND yields have gone further negative while broad stocks broke below support. 2 points: US banks have ROE of 15-17% and sell at barely 1xBV, EU bank equity trades much worse than bank debt.

Bottom Line: we remain of the view that 2021 will be a global economic BOOM year (10/2 Musings) supported by robust fiscal stimulus, record global liquidity, and underpinned by a global health outlook bolstered by therapeutics and vaccine(s). Both US (housing boom) and China (DCS strategy) should drive an inflation scare as consumption demand outpaces supply.

As such risk asset weakness should be bought. Risk reward is attractive given the degree of hedging in place which limits the downside coupled with forthcoming clarity on the big 3 issues.

Areas of equity focus remain: US Cyclicals/Value, SC, non-US DM equity, EU banks, East Asian Tech stack, China. In FI, we continue to favor: US HY (IG exposed to rising rates given duration drift & skinny coupon), US Preferreds, EM USD debt. Fun fact: $31T in DM Sov debt offers negative real yields, incl 95% of UST bonds vs 17% of EM Sov. Commodities remain attractive including both precious and base metals/miners, clean energy & oil on weakness.

PS. Several folks have asked about last weekend’s trip to the Mtns...well, we survived the climb but almost got flooded out by a nighttime T storm - the vagaries of the markets have nothing on that of the mountains! TGIF indeed.

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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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