As The Tri Polar World Turns: Jackson Hole's Real Message
680 words – a 3 minute read.
Executive Summary
Jackson Hole’s real message was not just one of more pain but rather the beginning of the validation of the high nominal growth world we have highlighted for some time.
While post JH cross asset action has been akin to a “technical torture chamber” we remain constructive across our Tri Polar World’s 3 key questions for the 2nd H: the pace of US inflation’s fall; the path of European energy prices & the smoothness of China’s exit from lockdown.
US inflation is likely to fall faster than most expect; we are at peak fear in terms of European energy and China has drawn a line under its property woes leading to the best month in over a decade for China HY bonds (yes you read that correctly).
We are focused on the end of the Fed’s front loading exercise and the rollover of the USD which will set the stage for significant asset allocation opportunities.
CLIMATE
Good news abounds in this space ranging from the Biden Climate Bill with its $370B in spending likely to catalyze another $1T on top according to McKinsey.
The private sector is moving aggressively on the transportation side with the old Rust Belt designation being converted into a flashy Battery Belt.
On the power generation side nuclear power is coming back in a big way with Japan’s PM Kishida breaking with post Fukushima taboos to embrace nuclear power once again. $ quote: “The fundamentals are the best they have ever been in the history of nuclear energy”.
ECONOMICS
US transitory inflation elements are falling like stones; we expect lagging labor and housing data to follow as quit rates roll over and new home inventory soars to levels last seen in 2009.
Recession risk is greater in Europe but even here record low unemployment, fiscal support, post Covid demand and EC action on the energy front can limit the downside.
We remain with our “Middle Path” view of slowing inflation & an expanding global economy supported by its desynchronized nature with US/EU slowing and Asia expanding.
POLITICS
Joe Biden is back and the US mid terms have gotten a lot tighter with less than 90 days to go.
Lula looks likely to win in Brazil, the center right in Italy and Pres. Xi is on track to get his 3rd term in mid October.
POLICY
The end of the Fed’s 75 bp front loading exercise in the coming weeks is likely to signal the peak in the USD as well.
Ebbing European energy fears will support to the Euro as will the gradual realization that the ECB is likely to tighten more in 2023 than the Fed.
The desynchronized nature of the global economy extends to monetary policy as well with the PBOC likely to ease further to support growth and the property sector. EM CB’s are close to done as well - a USD rollover will provide further support.
MARKETS
The pullback after July’s strong equity run is not a surprise – the question is what to do with it. We look to add to our favored positions with a growing focus on EM assets.
We remain focused on our earnings bridge to provide support to equities and note that more US companies are guiding higher rather than lower for the 2H (MS).
The USD is our main focus: technically it looks exposed on both a DXY and UUP basis; the US Current Account deficit tops 5% of GDP and foreign investors now own a net $17T in US financial assets. When the tide turns it is likely to turn bigly.
We see EM assets as a potential big winner from the high nominal growth, global cap ex boom economy, especially as the USD weakens.
The Thematic space remain a source of alpha, especially the Climate segment which is the largest in our TPW 20 model. Over the past year ICLN is down roughly 5%, ACWI is down over 16% and GDLC, a Crypto ETF, is down over 80%.
Enjoy the Labor Day Weekend - we have been laboring for sure!