As The Tri Polar World Turns: Coincidence? I Hope Not
640 words – a 2.5 minute read.
Executive Summary
Vacation was great, staying at The Middle Way & featuring a visit from a bear – a real live, black bear (check out the 23 charts/tables).
Recession call & Fed pivot talk premature post July jobs #; we continue to focus on the positive impact of a high nominal growth regime.
The earnings bridge we wrote about two weeks ago is intact with Q2 US and EU EPS up 10% and 22% Y/Y respectively while sales growth is running at 15% and 36%. Hard to see stocks down with these types of reports.
3 Tri Polar World keys for 2nd H: how fast US inflation rolls over; the path of European energy prices and the potential for China to learn to live with Covid.
We remain constructive on risk assets looking out to YE; near term markets have moved a lot, a period of digestion would be healthy
CLIMATE
After months of failure it seems like the Biden Admin will get a win on Climate with the Inflation Reduction Act likely to pass in the coming weeks. With $370B dedicated to the Climate fight it gives the US a chance to meet its Climate goals.
Russia’s invasion of the Ukraine and consequent energy pricing has led many to reconsider nuclear power for baseload needs. Germany’s Green Party with its anti nuclear history is a prime example as it now looks likely to accept nuclear power as an antidote to Putin’s blackmail.
ECONOMICS
Our former MS colleague Stephen Jen has written about the considerable global output gap that suggests once inflation peaks in coming months it could fall more sharply than many expect. This would fit our Market Speed narrative.
We continue to see the desynchronized nature of the global economy with the US and Europe slowing while China accelerates post lockdowns as beneficial to averting a global recession.
POLITICS
US mid terms 100 days away; Biden popularity picking up as he & Democrats notch some Ws.
This Fall features elections in Italy & Brazil as well as a likely 3rd term for China’s Pres. Xi.
POLICY
The coming quarters could mark the beginning of a more benign policy period as we shift to the new, new world post Covid, marked by high nominal growth, a cap ex boom to deal with the 3Cs of Covid, Climate & Conflict & rising productivity.
US policy is set – tightening both fiscal & monetary policy while Europe offers loose fiscal and gradually tighter monetary policy while China maintains a policy of modest action on both.
MARKETS
We continue to believe we are in a bottoming process for global equity. Markets have derrated in a very aggressive fashion with the 2nd largest cross asset drawdown in the past 30 yrs. (JPM). Our earnings bridge thesis supports current stock prices; the gap between the forward EPS outlook and forward valuation argues a modest recession is priced in & suggests opportunity.
The late Spring, early Summer bottoming of China tech and US Innovation were a great tell as to what came next. The June swoon and July bounce has led to some technical improvement in markets while risk appetite remains very low; seasonality is not great for the next two months and then improves substantially. Note SPY closed at 4131 on 4/29 and 4130 on 7/29; a period of digestion would be healthy.
We remain OW equity in our Global Multi Asset Model and do not see much appeal in 10 yr. UST at 2.7%. We continue to see Commodities as in a secular bull market and note the potential for gold as real yields stabilize. We continue to watch the USD and note weakness here would be very beneficial for commodities broadly as well as non US & EM assets.