Overview:
The past month has marked one of the most tumultuous periods in financial market history. It's been all about speed: the speed of the Covid-19 spread, the speed of the machine driven financial market response and finally the speed of the policy response.
This period has ended: deleveraging is complete, volatility has ebbed and there is finally time to think: of health, economics, politics, policy and markets: the components of our Global Risk Nexus (GRN) process.
Read MoreSpeakers: Jay Pelosky, CIO, TPW Investment Management & HANetf, Kevin Carter, Founder & CIO of EMQQ Index
The coronavirus spread has been relentless and has now gone global impacting every corner of the world’s economy, causing extreme market volatility and large sell-offs, leaving many investors feeling disorientated. As the markets grapple with the fallout, we’ll discuss the opportunities being created by the new quarantine economy and identify where investors should best position themselves to benefit over the long term.
OVERVIEW
Whipsaw city as fastest ever swing from all time high to bear market (16 days), OPEC + unravels & Biden comes back from the dead. Coronavirus spread & financial machines both too fast for policy makers. Containment solution carries immediate and significant economic cost - must be offset by policy action, failure to do so leads to volatility spikes, massive deleveraging and risk asset weakness.
Lack of global leadership means rolling thunder of individual country policy action. No place to hide: US equity still not cheap, Credit impaired, UST overbought & Commodities trying to find a floor. We have de risked and added to cash.
We are watching 4 factors: peak EU/US caseload (unlikely for weeks - esp in US); EU - US policy response (too little too late so far); consumer confidence & job numbers (services =70% of DM economies); investor positioning (much cleaner) & cheap markets ( US equity still not cheap, ROW is).
ECONOMICS
From Reflation 2020 to sudden stop, oil price shock and plummeting inflation breakevens.
Global Q1 GDP to include China hit, Q2 to be hit by EU and US weakness. Policy action now could save 2H V shaped recovery off a lower base. Recession risks rise; BLoomberg US recession indicator past 50.
DM service sector underpinned our Lower for Longer Global Growth call; containment policy a service sector killer. China rebound affected by ROW slowdown.
POLITICS
As President, Trump has never been in more trouble than he is today; the US policy response to the virus has been abysmal, from testing to medical stockpiles to messaging. Joe Biden’s miracle in S Carolina has catapulted him to front runner status.
Presidents Xi and Putin are in a different camp: Xi took a victory lap around Wuhan while Putin hit two birds with one nyet, forcing Saudi Arabia into a dangerous game of chicken that will take the legs out from under the US shale industry.
POLICY
Policy makers playing catch up to virus spread and machine led market discounting - DM failure to embrace fiscal spending at generational low in rates boggles the mind. Lack of leadership visible at every turn.
Shift from a health crisis to an economic issue has occurred - policy makers need to ensure it doesn't morph into a financial market meltdown. Containment in both health & wealth.
MARKETS
Markets hate uncertainty, humans are uncertain, machines are not. There seems to be many more questions than answers.
Volatility storm, a week of 50+ VIX readings culminating in a reading of 72 - highest since 80 in 2008 leading to massive deleveraging and total fear as shift in sentiment is complete. GLD and AGG for sale.
US equity remains expensive, Credit imparied, UST overbought, Commodities left for dead.
Equities in correlation of one land, down 25% or so, what to do now? Unless we are heading to a 2008 scenario which seems unlikely, bulk of the downward price action seems to have taken place. What's happened has happened - focus forward.
Could the end of the bull bring about the leadership change to non US equity, Value and Cyclists? Or will we return to the same leaders once events stabilize - a question worth pondering in the days & weeks ahead.
Read MoreNice tight clip from yesterday’s BTV show, The Open, with Jon Ferro. I come on at the 3 min mark and discuss the coronavirus, the three market factors inocula”
Read MoreJay joins Ben Phillips to cover 10 topics in 10 quick minutes.
Topics: Investment, Research, Market Risks, ESG, Inside ETFs, Value vs Growth, Stocks, Investment Philosophy, Investment Process, Tri-Polar World framework, Policy vs Politics, 2020 Outlook
Read MoreJay joined Summit Roy of ETF.com to discuss TPW investment philosophy and 2020 Outlook
Read MoreOVERVIEW
Coronavirus fears serve to cool an overheating global equity market. Fears dissipate quickly as abundant global liquidity, solid global economic data and better than expected US and EU earnings inoculate risk assets.
More importantly, January saw the reversal of nascent Q4 moves to non US equity, Value and Cyclical sectors; it was among the worst months in the past decade for US Value vs Growth. Late comers to the rally, ESG adherents and massive bond flows serve to inflate the bubble at the long end of the UST curve which helped expand a Big Tech equity bubble.
We remain in the Reflation 2020 camp and have taken advantage of the virus related selloff to add to broad Commodities. We expect the virus impact on growth to be temporary and are starting to envision a stronger than expected global growth rebound driven by a massive inventory rebuild. US - China trade fears and now coronavirus fears have led to bare bones inventory positions; restocking could lead to a backup in long rates and a reversal in growth stocks.
ECONOMICS
A Reuters poll of economists suggests Q1 China GDP of 4.5% and full year at 5.5%. With 80% of countries reporting Composite PMIs over 50 we expect the global economy to withstand the coronavirus. Inflation remains quiescent while solid job growth supports the DM economies.
POLITICS
6 weeks into 2020 and markets have already dealt with US - Iran tussle, Brexit, Trump impeachment, Xi virus risk and the US presidential election cycle. Xi is under pressure to solve dual challenge: end virus fears and restart the economy. US election noise to persist through November.
POLICY
China’s PBOC takes the mantle of global liquidity provider as it injects between $150-300B to offset virus impact on the Chinese economy. The Fed and ECB want to let inflation run hot. Trade front: US - UK, EU - US could be a source of wild card risk.
MARKETS
Q4 earnings mark the bottom of the EPS downturn; US running +2% y/y while European EPS x Energy running +7%. Cross asset outlook driven by virus outcome, long bond bubble and global growth rotation trade. The stronger the growth recovery (and we are starting to think it will be stronger than expected given inventory shortages) the greater the rotation to non US equity, long duration sell off, Value factor and Cyclical sector outperformance. We stay the course.
Read MoreU.S. equities closed at record highs on Wednesday as optimism grew that the global economy can recover from the impact of the coronavirus. On "Bloomberg ETF IQ Americas", Bloomberg's Scarlet Fu, Eric Balchunas and Vildana Hajric talk with Jay Pelosky, chief investment officer and co-founder of TPW Investment Management, about the recent bullish signs in flows, and the impact of the U.S. election race and the virus outbreak.
Read MoreNice tight clip from yesterday’s BTV show, The Open, with Jon Ferro. I come on at the 3 min mark and discuss the coronavirus, the three market factors inoculating risk assets against the virus and the opportunities we are exploiting.
Hint - no FOMO here!
Read MoreTri Polar World 3.0
Read MoreBelow is a 45 min interview with CIO Jay Pelosky as he sits down with Real Vision’s Ed Harrison for a deep dive into:
TPWIM’s 2020 road map: How Lower for Longer Global Growth = Higher For Longer Global Stock Prices
The (Geo Political) clouds part: the transition from Fall Risk Asset Rally to Reflation 2020
Be Advised: not ALL assets will rise in 2020
Central Banks to let inflation run hot: Cross Asset Implications
Science & Technology: the evolution of the Tri Polar World Framework
Why a 5% up year for SPY is bullish for non US equity
And much, much more…
Jamie had his first Bloomberg appearance on BTV ETF IQ. He discusses how he sees TPWIM’s Fall Rally POV extending into 2020. He gives a few ETFs that are likely to benefit from this view. Our focus remains on non-US DM equity, Value, and Cyclicals.
Read MoreNice clip from BTV Asian Open show where Jay lays out TPWIM’s Reflation 2020. He focuses on the Big Four signposts that guide our thesis: better geopolitical tone with trade talks & Brexit, better policy mix with global easing cycle and rising use of fiscal stimulus, global growth bottom as Global Manuf PMIs bottom setting up regimes shifts across assets: from bonds to stocks, regions, from US to non US DM, styles, from Growth to Value and sectors from Defensives to Cyclicals.
Read MoreOVERVIEW
The skies are clearing over the geopolitical and economic landscape. Clarity on Brexit and US-China trade could remove lots of angst while the industrial cycle bottoms & turns up.
The Lower for Longer Global Growth Path can lead to Higher for Longer Global Stock Prices & a continued Search for Yield. Our Big Four signposts remain constructive.
Notwithstanding strong risk asset performance, positioning remains light. Use pullbacks to allocate as REFLATION 2020 manifests itself.
ECONOMICS
Major Central Banks (Fed, ECB) plan to let inflation run above target to offset the lengthy period of below target performance. U shaped global economic upswing is supportive.
The Global Manufacturing PMI appears to have bottomed & is turning up. We view the weak US ISM as a “catch down” to the rest of the world which is entering an upswing. Think reflation not recession.
POLITICS
By month end we should have more clarity than at any point in the past several years on Brexit and US-China trade. US politics remain a wild card but given the lack of policy impact, little market reaction is expected until Spring. Global shift from wealth concentration to wealth distribution is worth a think.
POLICY
Fiscal stimulus is taking over from monetary policy be it the trillion-dollar US deficits, Japan’s biggest fiscal package since 2016, Europe’s Green New Deal or the Tory election manifesto.
Bottom line: Fiscal & monetary policymakers are focused on shoring up global growth, providing liquidity to financial markets and ensuring easy financial conditions. Inflation is to be allowed to run hot. Our Global Risk Nexus (GRN) work continues to suggest Policy progress.
MARKETS
What a difference a year makes as Q4 2019 shapes up to be the opposite of a year ago. Positioning remains light, Wall St remains cautious (av 2020 SPY target lowest in 15 years!) and geographic, style and sector tilts are all in early innings. We remain OW non US DM equity, Value and Cyclicals, much of which remains 15-20% BELOW 2018 highs.
Reflation 2020 also supports the Search for Yield (long duration at risk to inflation scare). Inflation being allowed to run hot suggests TIPS.
Read MoreJay Pelosky CIO sat with Fabian A. Onetti Founder of Winston Capital Advisors who brings 30 years experience in banking with 24 at Morgan Stanley.
Enjoy the video...
Read MoreExcited to present TPWIM’s Year Ahead Outlook: Reflation 2020
We remain on a Lower for Longer Global Growth Path which we believe can lead to Higher for Longer Global Stock Prices
Geopolitical uncertainty and recession fears have led investors to crowd into US equities and Growth/Defensive sectors & styles, marking perhaps the tail end of a decade long run of US/Growth Outperformance
Continued low growth & inflation suggest the Search for Yield can continue for another year
TPWIM’s Big Four Signposts guided us to our Fall Risk Asset Rally outlook and portfolio positioning
Let’s review the Big Four:
1. Global Easing Cycle to continue.
2. Global Growth Bottoming in process as Manuf PMIs inflect upward and service sector remains robust.
3. US - China Trade Tiff to stabilize in a phase one/mini deal.
4. Global Earnings Bottom as suggested by both revisions & outlook.
We expect the Fall Rally to morph into Reflation 2020 underpinned by global easing, fiscal stimulus & an industrial cycle rebound leading to positive surprises across: global growth, earnings growth & stock prices. Investors should buy the dips.
We favor Equity over Debt, Non US over US, Value over Growth, Cyclicals over Defensives, Credit over Sovereign, short duration over long, non $ over USD.
Where could we be wrong? US - China deal could fall apart; a hard Brexit could derail Europe’s nascent pickup; Manufacturing PMIs could reverse and decline, threatening the service sector and raising recession risk; Central Banks could shift back to tightening mode.
We look to 1995, 1998 & 2016-18 cycles for guidance on how things may play out.
Read MoreJay returns to BTV’s The Open to discuss how he sees TPWIM’s Fall Rally POV extending into 2020. He notes how the Trade Tiff is becoming less of a market issue as uncertainty ebbs while suggesting that should tariffs be rolled back the earnings effect could be significant. Jay makes the case that the bottoming in global growth is more important than the Trade talks and suggests a new corollary to our Lower for Longer Global Growth theme, namely that such an environment leads to Higher for Longer Global Stock Prices. Our focus remains on non-US DM equity, Value, and Cyclicals.
Read MoreNice tight clip from last night BTV Asian Open show where Jay lays out TPWIM’s Fall Risk Asset Rally playbook. He focuses on the Big Four signposts that guide our thesis: better geopolitical tone with trade talks & Brexit, better policy mix with global easing cycle and rising use of fiscal stimulus, Teflon like risk markets that have discounted plenty of bad news & an impending global growth bottom as Global Manuf PMIs bottom setting up regimes shifts across assets: from bonds to stocks, regions, from US to non US DM, styles, from Growth to Value and sectors from Defensives to Cyclicals.
OVERVIEW
The pace of action seems to be picking up as we enter Q4. Financial markets chopped a lot of wood in September as they did in August. Given the seasonally weak period and the stable nature of asset prices, one has to respect the Teflon like nature of current asset markets.
A Lower for Longer Global Growth Path remains our central theme. Our Big Four signposts remain constructive.
We expect to see positive catalysts during the quarter, perhaps on trade, perhaps on the global economic front and expect those catalysts to have positive implications for asset prices. We have added to the Cyclical nature of our portfolio solutions.
ECONOMICS
Developed economies are enjoying record low unemployment which has led to record highs in global consumer confidence, suggesting continued robust household spending over the next several quarters. No recession call here.
The Global Manufacturing PMI appears to have bottomed & is turning up. We view the weak US ISM as a “catch down” to the rest of the world which is bottoming.
POLITICS
A confluence of events suggests progress may be forthcoming on both US - China trade and Brexit. All the main actors: Pres Trump & Xi, PM Johnson, and the EU, can use a win. Risk assets would be big winners as well.
POLICY
Low inflation provides the cover for a continued global easing cycle while fiscal policy swings into action. Our Global Risk Nexus (GRN) work suggests progress on both the Economic & Policy front.
MARKETS
A long list of market positives offset concerns that Q4 19 will repeat last year’s horrid Q4. Central Banks’ easing rather than tightening, a better tone around trade and sharply lower rates all run counter to last year’s set up.
The shift in global PMI regimes suggests reasonable asset upside, particularly among the non US & Value and Cyclical segments of global equity markets while also supporting credit over Govts & favoring commodities.
Read MoreFull show of Jay on Bloomberg The Open. Go to minute 4:30 for great segment discussing how Q4 2019 will be different than Q4 2018 based on our Global Risk Nexus (GRN) research.
