As The Tri Polar World Turns: Narrative Speed

1150 words – a 4 minute read.

Executive Summary

We have focused on speed as a concept since Covid back in Spring 2020. Long time readers will recall Covid Speed – speed of spread, speed of policy response, speed of market reaction etc.

We followed that up with a piece on Climate Speed which led us to conclude that Climate is the single biggest global macro theme of the decade with every country in the world spending money on it between now & 2030.

This combined work sparked insight on how global intellectual & financial capital working together on common problems impacted the speed to market for key solutions. In turn this led us to write on Analytical Speed framed by McKinsey’s conviction that the 2020s will see more change than in the past 100 years combined. To date, we have a vaccine in 1/10th of the time, an explosion in clean energy & of course ChatGPT - we are on our way.

To stay on point we launched our TPW 20 Model Portfolio to sit alongside our flagship Global Multi Asset (GMA) model in mid 2021; 20 ETFs that are thematic in nature covering Climate, Future Tech, Aging, Infrastructure etc. Thus, it shouldn’t come as a surprise that we agree with Cathy Woods that Innovation represents the new NASDAQ.

Roughly a year ago we wrote about how speed is impacting our central framework – arguing that our Tri Polar World (TPW) construct of regional integration in Asia, Europe & the Americas represents the go forward, post globalization world. With Broken Britain a WaPo title and regional EV and semi production supply chains all the rage it seems on point.

All this brings us to today: Narrative Speed & the concept of the avalanche effect where small changes over time lead to a trigger moment where story lines flip and assets rip. We illustrate the concept through 22 charts from over 15 different research sources – demonstrating the value of open source research.

Watching the major IB’s tear up their 2023 outlooks within weeks of publishing them, followed by the think tanks and multilateral institutions, coupled with the current face ripping equity rally crystalized this idea.  We discuss examples including EU energy, China’s flip the script on Zero Covid and the US housing crisis that wasn’t.

We believe investment implications are many; we tease out several including the implications for how one works (with TPWA examples), how the investment world’s four most dangerous words - Its Different This Time, have become reality’s baseline and how what you did know no longer applies.

It’s a Miles Davis, “Kind of Blue” album moment – a new standard of improvisation is needed to stay ahead of the game – old dogmas die hard – they are expensive. So, you can have your polycrisis, a cool word but a rearview mirror view. We continue to move forward & embrace the new. Join us!

CLIMATE

We expect the Climate space to be a big winner from a gradual return to stability and normality as investors refocus on clean energy’s $1T annual global spend.

We remain focused on carbon reduction via KRBN, the EV revolution via LIT, clean energy via ICLN and the growing recognition of the benefits of nuclear power and extending plant lifespan via URNM.

ECONOMICS

Our 2023 views remain unchanged – no global recession, no European and no American recession. China going for growth, focused on domestic consumption and leveraging Covid driven excess savings follows the US and European playbook. We have a desynchronized global economy & a new growth cycle led by Asia.

Our medium term viewed also remains unchanged – a global cap ex boom to deal with the 3Cs of Covid, Climate & Conflict funded by public – private efforts exemplified by multiple pieces of US legislation: CHIPS Act, Inflation Reduction Act, Infrastructure bill and Europe’s Green New Deal, Fit for 55 programs.

As 2022’s headwinds: inflation, rate hikes, strong dollar, reverse & become 2023’s tailwinds we expect  the much poo, pood soft landing to develop as we have written about since last summer (Middle Way). 

POLITICS

Perhaps the biggest global political issue is the shelving of China’s Wolf Warrior diplomats as China ends three years of hibernation and starts to repair its relations with the US, Europe, Japan and others.

The US 2024 presidential race is starting to heat up – we expect little but soap operas out of DC for the next year plus beginning with the debt ceiling fight which should serve to cast a cloud over the USD.

POLICY

The narrative shift from one of the most aggressive global tightening cycles ever to a rate cutting cycle led by EM is the lead policy shift for 2023.

We do not expect to see the Fed join this rate cutting cycle as it goes on an extended pause to assess the impact of its rate hikes to date.

2023 policy action is Asian centric as Japan exits decades of deflation & the BOJ ends its YCC strategy which has defined its long struggle with low inflation & low growth – talk about a new narrative!

China has also made a major decision to go for growth as it makes the connection between stabilizing the property sector, unlocking domestic consumption & stimulating growth away from state led FAI.

MARKETS

We remain positioned for a secular shift away from US equity, Big Cap Tech led outperformance to a world led by non US equity markets, including both DM and EM. The past six months has been the appetizer – we are in the very early innings of this move.

Our main focus is the Asian domestic investor particularly in Japan and China. We see the end of YCC and the start of a JGB bear market as stimulating the return of Mrs. Watanabe’s daughter as well as domestic institutional reallocation back to domestic equity which represents, together with China, some of the cheapest equity in the world.

The same opportunity exists in China as domestic investors move away from property to the stock market. Many focus on the potential for foreign investors to buy these markets – we agree but see the domestic investor as key. We are double weight both markets in our GMA model.

We view the long duration UST bond rally as overdone; no recession means no 2023 rate cuts. Deeply underweight vs our FI BM, credit, both US HY and EM local FX and HY, are our main positions. We expect continued USD weakness as the ROW leads the rate cutting cycle/new global growth cycle.

Commodities remain a favored sector across the space from energy to metals both base and precious as well as the miners in what we expect to be a secular bull market.