Global Travel Notes:The blind leading the blind

We think there are three explanations for recent outperformance of the lowestvs highest multiple stocks, with none promising a LT sustainable pattern.

The first and most likely answer is the dominance of momentum investment.

In a world dominated by central banks (CBs) and the public sector, privatesector and investors have almost no visibility. Given limited (if any) freemarket signals, investment strategies need to either ruthlessly focus onfundamentals or become quick momentum followers. Given the nature ofinvestment mandates, the latter tends to be a far more prevalent trend. Lackof investment visibility implies over-crowded positions, and even a smallestdelta is sufficient to move momentum investors from one over-crowdedposition to another. In our view, it was a growing expectation of slower (if any)tightening by the Fed (starting with early Feb speech by NY Fed) balancedwith expectation of further liquidity support from ECB, BoJ and PBoC thatarrested US$ appreciation, leading to stabilization and some recovery incommodity prices; and forcing reversal in several over-crowded trades. Butany data point that reverses these expectations could just as easily andrapidly alter momentum positions.

The second explanation (which seems to have become a consensus view) isthat CBs agreed on an effective new Plaza Accord to avoid de-stabilizingcurrency movements. In other words, investors seem to believe that the Fedhas effectively undertaken to avoid as much as possible any tightening moveswhilst the ECB, BoJ and PBoC will attempt to underplay currency implications.

The basic objective is to avoid forcing China to devalue RMB (which in turnwould unleash another strong global deflationary wave) by keeping US$broadly flat. Whilst theoretically it makes sense, in practice we do not believethat another Plaza Accord is possible, as currency devaluation is the onlytransmission channel available to Eurozone or Japan whilst we maintainthat the US might re-visit stagflationary purgatory before returning back tostrong disinflation. We therefore remain convinced that divergent monetarypolicies remain the dominant trend, compounded by exceptionally low supplyof US$ (hence it explains why it is so hard to move US$ below DXY ~95-96).

The final answer is what we call “nationalization of credit and gross capitalformation”. Although over 12-18 months we believe that there is an almost100% probability of this coming to pass (and it would be called proactive fiscalpolicy rather than socialism; although socialism gets to heart of the matter),the key preconditions for such a dramatic policy shift have not yet crystallized.