As The Tri Polar World Turns: On Track
1315 words – a 4 minute read. Full Monthly: 5800 words, 29 charts from 16 different sources.
Executive Summary
What a November to remember – sure makes the case against market timing.
Thus this month’s title – on track – as in on track for YE rally and on track for our 4 for 24 macro and market surprises first laid out a month ago in our 2024 Outlook.
While seasonality and technicals remain supportive folks have flipped from bearish to bullish while positioning is not as favorable as it was 4-6 weeks ago. Thus, a pullback here would not be a surprise – what should one do? Buy it.
Our #1 macro surprise for 2024 – lower than expected inflation sooner than expected - is already unfolding on both sides of the Atlantic. We expect more to come and see the explosion in US multifamily building as assuring lower rents & continued disinflation ahead.
Our 2024 investment formula remains: lower inflation> lower rates > weaker USD > ROW/Commodity OP.
We are developing more comfort in macro surprise #3 – the return to macro stability & see record low VIX and collapsing MOVE indices as signaling what lies ahead. With US equities flat over the past 2 yrs. (SPY flat to the decimal point 11/30/23 vs 11/30/21 at 4567) we have digested much: Covid, inflation spike, rate spike, conflict, climate etc.
Thus, we are set up for a period of relative macro stability which provides the $1T reward unlock we first wrote about 3 months ago as all that money that has moved into US and global MMF (totaling roughly $6T and $8T respectively) can start to flow out.
The question is to flow where? We think to EM assets both debt and equity. We are the most bullish on EM we have been in years and given my role as founding EM strategist at MS back in the day we know the space.
EM is dirt cheap relative to the US, is at a record low on relative performance basis (charts galore in full monthly) is a big winner from Fed on hold & from resultant EM led rate cut cycle. Its also the big winner from supply chain regionalization and as such we now have EM equity exposure in each of the Tri Polar World’s 3 main regions: Asia, Europe & The Americas.
CLIMATE
Much of what we wrote in these pages a month ago regarding the disconnect between soaring renewable energy adoption and collapsing clean energy stocks has been picked up by various publications.
The good news is the various issues - lack of inflation protection, soaring input prices, overcrowding in Chinese solar, etc. are now well understood and pretty well priced in. Lower rates and macro stability should provide a more favorable backdrop.
We don’t expect much from COP28 with its focus on generating funds for low income countries to mitigate climate effects. The real game is on the fossil fuel side and growing pressure for it to step up to climate imperatives rather than just provide lip service.
ECONOMICS
2024’s global economic story is one of declining inflation (except in Japan) leading to some market driven rate relief supporting fully employed populaces in their consumption habits. Thanksgiving shopping everyone?
The evergreen recession call has gone quiet for the moment but few are embracing our 4th macro surprise, namely the resolution of the early cycle vs late cycle debate. As good news stacks on good news we expect that to change. We remain firmly in the early cycle global economic recovery camp.
Our US focus is on rents and their impact on inflation; in Europe the focus is on the sick man, Germany, bottoming while the periphery benefits from continued EU aid disbursement via Next Gen & Fit for 55 programs.
We continue to track Chinese policy as it seeks to gain traction, boosting consumer & private business confidence and sustaining 5% growth. We see growing signs of Govt intensity – especially around housing and local Govt debt relief.
Japan’s inflation remains in focus; we wait for the Spring wage round to see if real wages can start to catch up, boosting consumption and helping the BOJ gain conviction in out year inflation.
POLITICS
Geopolitics are very rarely a reason to sell stocks and that truism has been renewed with ACWI rebounding strongly even as ME conflict rages.
US politics remain in a very strange place; its too soon to place much weight on polling.
European politics have switched bogeymen from the populists of old (remember Salvini) to the far right of today as Dutchman Geert Wilder’s Freedom Party gains the top spot. Coalition building is tough and we expect the far right to find it difficult to govern just as the populists did.
Taiwan’s upcoming election will be fought by multiple contenders as the unity ticket fell apart almost as soon as it was announced. We expect little to change as China has more than enough on its plate to contemplate any major saber rattling.
POLICY
Global policy is shifting from being monetary led to fiscal policy led. This is true even if there is little legislation to that effect this year or next as the money has been budgeted in both the US and Europe. Japan continues to provide fiscal stimulus while China tip toes.
We are transitioning from the most aggressive rate hike cycle in modern times to a rate cutting cycle led by EM (globally, there have been more rate cuts than hikes over the past month).
We are much more focused on the WHY of US rate cuts than the WHEN and expect the why to be because inflation has fallen such that real rates allow for insurance cuts not bc recession is imminent. We expect the Fed and ECB to become “frenemies” of the markets in the year ahead.
MARKETS
A post record November pullback would be normal and even healthy – we would be buyers on weakness. Technicals remain supportive with 90% of ACWI markets above 50 dmav and all major regions back above their 200dmav including EEM. We remain fully invested & OW global stocks.
In 2022 we were constructive on European equity and especially EU banks; in 2023 we highlighted Japanese equity which OPed SPY on local currency basis. For 2024 we are heavily OW EM assets both debt and equity.
Our 4 for 24 market surprises include non US OP as surprise #1, while surprise #2 is a weaker USd driven by lower rates, eroding rate differentials, better growth in Europe etc. The dollar remains vastly OVed vs both DM and EM FX.
Surprise #3 calls for industrial metals to benefit from this global backdrop of declining rates, weaker $, growing macro stability etc. We are long uranium, copper and gold miners. As real rates fall and the USD weakens, gold should sustain its recent breakout. We remain OW Commodities.
Our 4th and final surprise spoke to the appealing risk reward set up we see in Chinese equity, a set up that remains appealing to us but apparently not to anyone else as foreigners continue a record selling spree. Selling which has left Chinese equity at very attractive relative and absolute valuations. GS for example, has a PT on BABA that calls for 70% + upside.
We remain UW FI but have dipped our toe back into the UST market for the first time in several years with a position in 2 yr. UST that should benefit from the set up described above. We don’t see much room for capital appreciation in the 10 yr. at 4.3%.
We continue to like credit and note that both the US HY space and Asian credit are shrinking asset classes with JPM suggesting roughly 12% of its Asian credit index will be returned to investors next year. We like shrinking asset classes.