As The Tri Polar World Turns: Look Behind The Curtain

1020 words – a 2.5 minute read.

Executive Summary

We go back to one of our favorite movies: The Wizard of Oz, to discuss what happens when investors pull back the curtain on the Fear, Uncertainty & Doubt (FUD) hype machine.

We believe that what lies behind the curtain is not a big, bad, brown Kodiak bear but rather a series of important policy changes that are in process of unfolding across the Tri Polar World.

These include: Central Bank acceptance of higher inflation targets; the return of US Industrial Policy after a 70 year absence; Europe’s push for integration across energy, tech, defense and climate; Japan’s shift off YCC and China’s adoption of a domestic demand led growth strategy.

All these culminate in a global cap ex boom and high nominal growth world. This world should be good for risk assets, especially outside the US. We expect a Fed on hold to = a weak USD which in turn supports non US equity outperformance.

As we move past Covid & beyond inflation (a 2022 story), we think we are early cycle not late & that those investors who can look behind the curtain and peer into the near future will be the winners.

We are not going back to the low growth, low inflation 2010-2020 period but rather are entering a high nominal growth world, a brave new world of rapid change as AI becomes part of everyday living and the value of looking backward shrinks while the premium for looking forward expands.

Enjoy this monthly – its 6k+ words & includes over 25 charts and tables from a wide variety of our best sources.

CLIMATE

As the Covid years recede followed by their inflation implications we expect the focus to shift to climate and climate mitigation.

Climate is becoming a main driver to the unfolding of our Tri Polar World as new EV supply chains develop across the Americas, Europe & Asia.

The public – private nature of climate mitigation funding will protect it and by so doing support the NT growth outlook for the US and Europe in particular.

Climate remains the single biggest global macro theme of the decade – we are exposed through both our model portfolios, especially our TPW 20 thematic model.

ECONOMICS

Even us, who wrote Narrative Speed just a few months back, have been challenged by ping ponging data and economic scenarios of late.

Having a point of view, stress testing it against folks one respects who hold different points of view – Steve Blitz at Lombard, Chase Taylor at Pinecone Macro - has real value. We respect both but disagree with their outlook for imminent recession, either credit driven as Steve expects or by a jobs bust as Chase lays out.

The fall off the cliff US recession doesn’t compute for us. Employment while cooling remains robust, housing has bottomed, CRE is a slow walk, credit is solid, manufacturing is close to the end of its decline (ISM) & a weak USD will help.

Elsewhere, recent data suggests Europe is picking up speed not slowing. Its Composite PMI which averaged 48.5 in 2H 2022 averaged 52 in Q1 2023 with a March reading of 53.7. Does that sound recessionary to you?

We have highlighted our view of a desynchronized global economy in past writings. Asia is accelerating led by China where Caixin’s March Services PMI just came in at 57.8, the highest in over two years. Japan’s industrial production rose 4.5% M/M in February while the Asian Development Bank (ADB) just boosted Developing Asia’s 2023 GDP forecast to 4.8%.

POLITICS

Former Pres. Trump gets arraigned & Manhattan barely blinks; President Biden remains content to let the former president enjoy the limelight.

The Europeans are visiting China & trying to get Pres. Xi to put some muscle behind his friend of the world approach, hoping he can bring Pres. Putin to the table as he did Saudi Arabia and Iran.

POLICY

We believe the Fed is done raising rates and will join the Bank of Canada and others on hold. This will give EM CB’s the green light to begin a new rate cutting cycle.

We maintain our “Middle Path” view and do not expect a US recession nor the rate cuts markets have priced in for 2H 2023.

We expect the BOJ to gradually move off its YCC policy under new Governor Ueda, a move that could trigger domestic investor reallocation back into equities.

China’s policy mix continues to fuel its growth recovery with residential property sale proceeds up 29% Y/Y in March, following 15% Y/Y gains in February.

MARKETS

The gap between what US economists are forecasting (recession) and what stock prices are doing – back to back 7% return Qs - suggests real confusion as does investors embrace of cash – one of the quarter’s worst performing assets.

It reminds us of Bernard Baruch’s famous quote: The main purpose of the stock market is to make fools of as many people as possible”. Been a good run that!

BofA has done some good work highlighting how its various global earnings indicators coalesce around high single digit global EPS growth while “growth sensitive asset prices are not far from the cycle lows, pricing in 2023 world EPS growth at -10%, implying that a lot of bad news about global earnings/economic growth has already been absorbed by financial markets”. We couldn’t agree more.

Bloomberg notes the S&P500 has been range trading round 4k for roughly 233 days vs an average range trading period of roughly 250 days. The Fed tends to be the catalyst to force a break out.

Our bet is a break up and out as the Fed pauses while the US economy remains resilient and the non US economy accelerates into a new global growth cycle.  Thus, the recent cross asset pricing in of recession offers some real opportunities for those who share this view.

Enjoy Wednesday’s video with my former MS buddies now at Winston Capital. It’s an AI world so I let my humanity shine through… go ahead, prove yourself! https://www.youtube.com/watch?v=PRFIwu5qi5k

Happy Passover, Easter, Ramadan or weekend!