Some Thoughts on the Tri Polar World
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