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WHAT YOU NEED TO KNOW!

DAX v RUSSELL TAKING OUT MULTI-YEAR HIGHS

The DAX vs Russell chart looks impressive printing new multi-year highs.

We called the shift to International Markets in our 2025 Investment Themes and the EU & Defense throughout Q1 in our weekly Lab Reports!

Sometimes we just get things right!!!!

Europe has remained firmly well bid...realizing almost no downside beta and all the upside beta when markets are higher. Think capital continues to look for pockets of diversification and that means other (relatively) liquid developed markets will continue to see the benefit.

RESEARCH - MARKET DRIVERS

1- HOW OVERVALUED IS THE US DOLLAR?

• Fair Value for DXY has remained relatively stable over the past 15 years. In the year since the Dollar’s rally in 2021/22, it has since sustained a overvaluation around +20%, though the year-to-date Dollar softening trend has cut that valuation gap in half. 
• Current Fair value estimates imply that the Dollar after recently falling is:

 ~9% overvalued on a DXY basis and

~13% on a Trade-Weighted basis.

2- Q1 2025 EARNING SEASON RECAP

• Q1 earnings have been better than expected.
• However, beats have not been rewarded as exuberantly as usual and misses have been hammered.
• Earnings Better Than Feared, but analysts suggest it's time to add hedges.

DEVELOPMENTS TO WATCH - POLICY DRIVERS

1- THE FOOD INDUSTRY HIJACKED THE FDA & OUR HEALTH - HHS SECRETARY KENNEDY SPELLS IT OUT

• The food industry hijacked a decades' old FDA loophole —one that allowed a flood of untested chemicals into our diets.
• It started back in the 1940s, when the FDA first began regulating food.
• At the time, they made one reasonable exception: ingredients with a long history of safe use — like wheat, eggs, and dair — wouldn’t need testing.
• The result? America now has more than 10,000 approved food ingredients. E urope? Just 400.
• “The people who are most obese are also malnourished. That’s never been seen before in human history.”

2- EU LEADERS TALKING AN EU MILITARY

• Europe is once again talking about forming its own defense alliance.
• The idea of a European army—discussed on and off since the early days of the Cold War — was revived in February by Volodymyr Zelensky.
• The Ukrainian president claims that Donald Trump’s retraction of military support for Ukraine and ambivalence towards the EU shows that the bloc urgently needs its own military unit.
• Zelensky has reignited a debate that has failed to generate consensus within Europe, despite its long history.

IT TAKES MONEY OR IN ECONOMIC PARLANCE: MASSIVE "REFLATION".

GLOBAL ECONOMIC REPORTING - ECONOMIC DRIVERS

Q2 GDP

• Q2 surging to 2.4% from -0.3%, which would make it higher than the average GDP print reported since the start of 2022.
• With the Q1 GDP slowdown (entirely on the back of a surge in imports to frontrun tariffs and a slowdown in government spending, both in line with Trump's policies), the difference between weather adjusted US power demand and US GDP growth flipped positive to +0.4pp[1] from -0.9pp a month ago and an average of -1.9pp in the past decade.  In other words, the historical relationship between the two series suggests that US GDP growth today is 3% or more. 

ISM SURVEY

• While tariff announcements mean manufacturing dominates the news, a worrying backstory is developing in the vastly larger services economy, where business activity and hiring have come closer to stalling in April amid plunging business confidence.
• Business and consumer facing service providers alike, and especially financial services firms, are reporting markedly weaker growth prospects, citing intensifying uncertainty over the economic outlook amid recent tariff announcements and ongoing federal spending cuts.

RESEARCH - MARKET DRIVERS

1- HOW OVERVALUED IS THE US DOLLAR?

Analysts have found that valuation is actually not a catalyst for movements in the Dollar. However, it is still helpful to think about fair value when trying to understand how far the US dollar can adjust if economic or market conditions change.

Recently the US Dollar’s strong valuation has been driven by elevated global allocations chasing superior return prospects in the US. With those returns now eroding currency analysts expect the Dollar’s misalignment to erode gradually as well.

CHART RIGHT: The Dollar is Overvalued Relative to the Goldman Sachs "DEER" Model, but the Gap is Closing!

HOW OVERVALUED IS THE USD?

The question is "how overvalued is the USD?"

Fair Value for DXY has remained relatively stable over the past 15 years. In the year since the Dollar’s rally in 2021/22, it has since sustained an overvaluation around +20%, though the year-to-date Dollar softening trend has cut that valuation gap in half. 

Current Fair value estimates imply that the Dollar after recently falling is:



~9% overvalued on a DXY basis and

~13% on a Trade-Weighted basis.

The "DEER" model has been the primary model for assessing foreign exchange “fair value” at Goldman Sachs for almost 30 years. FX fair value is hard to pin down because there is no underlying cash flow, but this model assumes that Real Exchange rates mean-revert over time, but:

• Differences in Productivity and
• Terms of Trade will influence the underlying trend.

This is basically a PPP model in FX lingo, with some twists. The model has 4 parts:

1. The Long Run Average
2. Relative Rates of Inflation
3. Productivity and
4. Terms of Trade.

In practice, for a currency like EUR/USD or GBP/USD, the long-run average is the dominant driver, with inflation differentials providing a supporting role. For currencies like the Australian Dollar, terms of trade (commodity prices) will play a bigger role. Productivity will have a bigger impact in emerging markets. 

Valuation gaps take roughly five years to close with a ~20% per annum convergence rate. Further out, spot tends to hover around fair value before overshooting at the eight-to-ten-year horizon. The empirical evidence suggests investors should not be surprised if currencies continue to appreciate or depreciate once they reach fair value, although there may be too much uncertainty to explicitly forecast this sort of overshoot long into the future. It depends on the currency pair, but in general when comparing FX to other asset classes, fair value isn’t as strong of an anchor or stopping point.

2- Q1 2025 EARNING SEASON RECAP

Earnings Better Than Feared, But Top Goldman Trader Suggests It's Time

To Add Hedges

Q1 earnings have been better than expected (chart right)

However, beats have not been rewarded as exuberantly as usual and misses have been hammered (chart below).

With management commentary focused on the risk of recession and the potential impact of tariffs, 24% of the 357 S&P 500 companies reporting so far have mentioned the word “recession” on their conference calls, compared with just 2% last quarter.

(chart right).

Goldman Sachs warned last week that the bar was set high for the S&P to move higher and it did, clearing all the hurdles:

• Earnings were decent (especially big tech).
• Hard data was good.
• The rhetoric on Tariffs toned down.

We now have had 9 days of consecutive S&P closing green, (first time since 2004 and this only happened 14x since 1970), and the sum of MOC imbalances over the past 8 days is $23bn!

We are at 5700 again. Buybacks next week will come in full force, with most companies out of their blackout period and we would expect to see $4bn a day of buying. And CTAs are also adding now.

They bought $51bn of global equities last week and are expected to buy another $51bn this week. On US Equities only, we estimate $2.5bn of US Equity buying every day next week. So totaling $6.5bn of daily passive US Equity buying this week my friends... it's significant.

The passive buying of Buybacks and CTAs outlined above should create a grind higher all else equal, but I think we are in a state in which the bar for the narrative to improve in hard data and tariffs is much higher than for it to break down. 

Not to mention the market is now pricing LESS FED easing until year end, (currently -80bps till year end, versus -89bps 1w ago).

GS PB data for last week shows that, after two weeks of net buying, global equities were modestly net sold this week (-0.3 SDs one-year). North America and DM Asia were net sold, while Europe and EM Asia were net bought. Macro Products were net sold for the first time in 4 weeks, driven by short sales.

Hedge Funds rotated into US Defensives after selling the group in 5 of the last 6 weeks.  Defensive stocks – Health Care, Utilities, and Staples combined – saw the largest notional net buying in ~3 months, as all 3 sectors were net bought this week, driven almost entirely by long buys.  

DEVELOPMENTS TO WATCH - POLICY DRIVERS

1- THE FOOD INDUSTRY HIJACKED THE FDA & OUR HEALTH!

HHS SECRETARY KENNEDY SPELLS OUT THE UGLY TRUTH

SOURCE: Via VigilantFox.com

VIDEO INTERVIEW:

https://twitter.com/i/status/1920222797034307925

SUPPORTING VIDEO: https://twitter.com/i/status/1920222427277324564

SUPPORTING VIDEO

https://twitter.com/i/status/1920224201333473408

BACKGROUND

In the late 1980s and early ’90s, something strange started happening in America. Chronic illness was on the rise. Obesity rates soared. Autoimmune diseases became more common. It felt like the health of the nation was unraveling.

According to HHS Secretary Robert F. Kennedy Jr., that wasn’t a coincidence. It was the result of a corporate takeover.

“At that time… the tobacco industry took over the food industry,” he said.

“By the early 1990s, the two biggest food companies in the world were R.J. Reynolds and Philip Morris.”

The same companies that had perfected the art of chemical addiction through cigarettes were now running the food system. And Kennedy says they brought the same playbook with them.

“They began moving scientists from the endeavor of making tobacco more addictive to developing new lab ingredients that would make food addictive.”

That’s when everything changed.

What had once been real food — grown, cooked, and served — became something else entirely. A highly engineered product designed not to nourish, but to keep people hooked.

The health consequences were immediate. But behind it all, there was something even more insidious: the regulatory system meant to protect Americans had already been compromised.

“Those chemicals were largely untested because of the capture of the FDA by the food and drug industries,” Kennedy warned.

The public trusted the FDA. But the FDA, Kennedy says, had already been captured by the very industries it was supposed to regulate.

SUBSTANCES "GENERALLY RECOGNIZED AS SAFE" (GRAS) FINAL RULE & RELATED GUIDANCE

Then came the dirtiest trick of all. Kennedy revealed how the food industry hijacked a decades-old FDA loophole — one that allowed a flood of untested chemicals into our diets. It started back in the 1940s, when the FDA first began regulating food.

At the time, they made one reasonable exception: ingredients with a long history of safe use — like wheat, eggs, and dairy— wouldn’t need testing.

“When the FDA first began regulating foods in the 1940s, it exempted food ingredients that had been used for generations—like wheat, eggs, and dairy,” Kennedy said.

“They didn’t require testing for those.”  But decades later, that narrow exemption was quietly weaponized.

“The food industry later captured that label and applied it to every new chemical they wanted to add.”

Instead of testing new additives, companies simply claimed they were “generally recognized as safe.” And the FDA, Kennedy said, went along with it.

The result? America now has more than 10,000 approved food ingredients. Europe? Just 400.

“In the U.S., chemicals are never safety tested before being added to food,” he said.

Some of those ingredients are derived from petroleum. Others mimic the flavor of strawberries or blueberries, without providing a single nutrient. And they’re not just empty calories.

“These chemicals hijack the brain and trick the body into eating more food while getting less nutrition.”

That’s not just unhealthy—it’s unprecedented.

“We are now the fourth most obese country in the world,” Kennedy said, “yet for the first time in history, obesity is often accompanied by malnutrition.”

Think about that for a second.

“The people who are most obese are also malnourished. That’s never been seen before in human history.”

But Kennedy isn’t just exposing the problem — he’s taking action.

For decades, food companies have been allowed to slip harmful ingredients into our food. That may finally change.

In March, Secretary Kennedy directed the FDA to begin dismantling the very loophole that made this possible.

He instructed Acting FDA Commissioner Sara Brenner to “take steps to explore potential rulemaking to revise its Substances Generally Recognized as Safe (GRAS) Final Rule and related guidance to eliminate the self-affirmed GRAS pathway,” according to an HHS press release.

Translation: no more rubber-stamping chemicals without oversight. HHS announced plans to work with Congress to pass new legislation that would formally close the GRAS loophole. As of now, the timeline for these changes remains unclear — HHS did not respond when asked how soon they plan to act.

ACTIONS UNDERWAY

Kennedy wrapped it all up with a hopeful message:

• “The team here is extraordinary. A lot of people are coming to HHS now because they see an intergenerational opportunity to change the way we do things, and we’re moving fast.”
• He outlined several major steps already underway.
• “We’ve announced a ban on all petroleum-based synthetic food dyes. We’ve changed the GRAS standards so people can’t rubber-stamp chemicals into food anymore.”
• “We’re reviewing chemicals already in our food.”
• “We’ve launched Operation Stork Speed to ensure mothers can get the healthiest milk for their children.”

The system was rigged. But now, the tide is turning. And this time, it’s the people — not the corporations — who are finally calling the shots.

FURTHER MUST READ RESEARCH: As Predicted, America's Food System Is Failing - Time To Plant New Seeds

2- EU LEADERS TALKING AN EU MILITARY

SOURCE: Mark Nayler via the Foundation for Economic Education (FEE)

WHAT ZELENSKY HAS FERMENTED

Europe is once again talking about forming its own defense alliance. The idea of a European army — discussed on and off since the early days of the Cold War — was revived in February by Volodymyr Zelensky. The Ukrainian president claims that Donald Trump’s retraction of military support for Ukraine and ambivalence towards the EU shows that the bloc urgently needs its own military unit. Zelensky has reignited a debate that has failed to generate consensus within Europe, despite its long history.

SPAIN

Spain’s Socialist prime minister, Pedro Sánchez, is the latest EU leader to echo Zelensky — and according to a YouGov poll conducted in 2022, 64 percent of Spaniards are on his side. On March 28, he announced that Europe needs its own defense force to combat “old imperialist impulses in Russia,” especially in light of reduced support from the US. He called for a military force “with troops from all 27 member countries, working under a single flag with the same objectives.” Sánchez also wants greater economic integration within the bloc, and recently proposed a debt mutualization scheme —which has caused division along similar lines as the idea of a 27-nation army.

Despite Sánchez’s crusading rhetoric, one suspects there’s a self-interested motivation behind his call for an EU army. He is under intense pressure from both the EU and the United States to increase Spain’s defense spending; but anti-military sentiment in the country is strong, and he governs in partnership with Sumar, a leftist alliance that opposes increased investment in arms and troops. By claiming that EU defense is a collective, rather than national, responsibility, Sánchez no doubt hopes to deflect attention from his own difficulties.

The EU does collaborate on defense to some extent. At any one time, at least one multinational Battle Group, consisting of 1,500 troops, is on standby. These reached operational capacity in 2007, but according to the multinational military headquarters Eurocorps, “issues relating to political will, usability, and financial solidarity have prevented them from being deployed.” Precisely the same problems would arise within an EU army, of course — but on a much larger scale. There is also the European Maritime Force, formed in 1995 by Spain, France, Italy and Portugal to conduct sea control, crisis response operations and humanitarian missions. Advocates of an EU army argue that while these collaborative forces are an important pillar of the bloc’s defense, they are not equipped for long-running conflicts. They also claim that the EU is too dependent on the US for protection — a point on which Trump 2.0 completely agrees.

The notion of an EU army was first suggested in the early 1950s as a way of building capability against the Soviet Union without rearming West Germany. Proposed by the French government, it would have consisted of the EU’s six founding members — France, Luxembourg, the Netherlands, Italy, West Germany and Belgium. A treaty creating the European Defence Community was signed in 1952, but never ratified; instead, West Germany joined NATO and the Western Union, a military alliance formed in 1948, and the idea was shelved.

BACKGROUND

This decades-old idea was revived in 2016. Then, as now, a perceived threat from Russia was intensified by the sudden withdrawal of a military heavyweight. Following the Brexit referendum, in which 52 percent of the UK opted to leave the EU, the prime ministers of Hungary and the Czech Republic called for a European army. They were joined by Ursula von der Leyen — then Germany’s defense minister — who said that Europe needed a “Schengen of defense” — a reference to the continent’s border-free Schengen Area, made up of 29 nations, (four of which are outside the EU). Jean-Claude Juncker, her predecessor as president of the EU Commission, had said a year earlier that the EU needed its own army in order to “convey a clear message to Russia that we are serious about defending our European values.” Whenever those are perceived to be in danger, the old idea of an EU army is reanimated.

Since Brexit, it has steadily gained traction. The idea was endorsed in 2018 by Angela Merkel, then the German chancellor, and French president Emmanuel Macron. A furious Trump, at that point halfway through his first term, saw it as an act of ingratitude towards NATO: “They were starting to learn German in Paris before the US came along,” he tweeted (a misleading reference to World War II). Ursula von der Leyen, president of the EU Commission since 2019, has called for a “European Defence Union,” and last month unveiled “Rearm Europe” — a five-year plan quickly rebranded “Readiness 2030,” after Spain and Italy complained that the original title was too militaristic. (Sánchez didn’t explain how that objection sits with his demand for an EU fighting force, presumably armed with more than goodwill.) Von der Leyen plans to mobilize €800 billion for the bloc’s defense over the next five years, by which point some analysts believe Russia could be ready to attack a member of NATO or the EU. Italy’s foreign minister, Antonio Tajani, also supports the idea of an EU army.

But Kaja Kallas, the EU’s foreign affairs chief and vice president of the EU Commission, claims that it’s not necessary. What’s more important, she says, is that the bloc’s 27 armies “are capable and can effectively work together to deter our rivals and defend Europe.” She is supported by Poland’s foreign minister, Radosław Sikorski, who is adamant that an EU army “will not happen,” and Denmark, which has historically seen NATO as the continent’s primary defense mechanism. During its membership of the bloc, the UK opposed the idea of an EU army for the same reason, arguing that it would unnecessarily duplicate NATO.

THE CENTRA PROBLEM

• One of the major practical difficulties is how a 27-nation army would be funded.
• The issue of mutual financing has also arisen over the EU’s call for members to increase their national defense budgets — and there is no agreement there, either.
• Rather than the cheap loans suggested by von der Leyen as part of the “Readiness 2030” plan, heavily indebted southern nations such as Spain and Italy favor common defense bonds, or grants similar to those distributed during the pandemic.
• The suggestion has revived a long-standing grievance amongst wealthier northern members such as Germany and the Netherlands, which are reluctant to fund joint initiatives: “No Eurobonds,” said Dutch prime minister Dick Schoof after a meeting of EU leaders in late March.
• Another possibility, as recently suggested by France’s economy minister, is increasing taxes, especially on the wealthy.

Sánchez claims the EU should reconsider the idea of a joint army, because its individual members have been unable to find common ground on defense. But that same problem would likely prevent the creation of an EU fighting force. Since their formation almost twenty years ago, none of the EU’s Battle Groups — which typically consist of troops from three or four countries — have been activated. This hardly suggests that the bloc is ready to form a 27-nation army, controlled from Brussels and entering battle under a blue-and-gold flag.

GLOBAL ECONOMIC INDICATORS - ECONOMIC DRIVERS

US

US Q2 GDP RISING

The liberal media does everything it can to portray the US economy as crippled by a brutal recession by banging the table on what a bunch of Democrats polled by UMich think may happen some time in the future. Meanwhile, the hard data stubbornly refuses to validate this outlook by showing that what is happening is ...well ... nothing! As Powell himself yesterday noted, secondary indicators confirm that not only is the US economy not slowing, but is growing at a far faster pace than even the optimists claim.

What is remarkable, is that with the Q1 GDP slowdown, (entirely on the back of a surge in imports to frontrun tariffs and a slowdown in government spending, both in line with Trump's policies), the difference between weather adjusted US power demand and US GDP growth flipped positive to +0.4pp[1] from -0.9pp a month ago and an average of -1.9pp in the past decade.  In other words, the historical relationship between the two series suggests that US GDP growth today is 3% or more. 

Q2 surging to 2.4% from -0.3%, which would make it higher than the average GDP print reported since the start of 2022.

ISM SURVEY

"While tariff announcements mean manufacturing dominates the news, a worrying backstory is developing in the vastly larger services economy, where business activity and hiring have come closer to stalling in April amid plunging business confidence,"  Chris Williamson, Chief Business Economist at S&P Global Market Intelligence warns that:

"Business and consumer facing service providers alike, and especially financial services firms, are reporting markedly weaker growth prospects, citing intensifying uncertainty over the economic outlook amid recent tariff announcements and ongoing federal spending cuts."

"A key area of weakness is slumping exports of services, which is now falling at rate not seen since 2022, but domestic demand is also reportedly waning as confidence slides lower.

But the stagflationary aspects seen in the Manufacturing survey are also showing up in Services...

"Higher prices paid for imports due to tariffs are also driving up service sector firms’ costs, feeding though to higher prices, notably in consumer-facing industries such as restaurants and hotels.

The resulting bottom line from the services sector is a heightened risk of stalling growth and rising inflation, or stagflation."

• The S&P Global Services PMI fell from 54.4 to 50.8 (below the 51.4 flash print) in final April data - the lowest since Oct 2023.

The S&P Global US Composite PMI® fell to 50.6 in April, down from March’s 53.5 and its lowest level since September 2023.

Prices Paid at the highest since Jan 2023, (even though New Orders and Employment picked up modestly).

US NET EXPORTS

THE US STRATEGIC IMPERATIVE

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