As The Tri Polar World Turns: Tag Team
850 words – a 2 minute read.
EXECUTIVE SUMMARY
Watching risk assets get flung from one side of the ring to the other reminds me of watching wrestling on TV as a kid. Writing this Monthly in real time has been like wrestling a greased pig.
Investors are mis ordering the Fed, Russia and Covid in terms of importance. Omicron’s ebb and the resulting global synchronized reopening/expansion is the most important factor, yet it is receiving the least attention.
Russia’s unprovoked invasion of the Ukraine may end up doing global investors’ a favor, taking out extreme Fed risk and giving, if not peace a chance, a near term rally and longer term “boomflation” a chance.
The Fed has been fully discounted; Thursday’s epic cross market action tells the tale: ytd equity losers lead the reversal, 50 bp March Fed hike is out the window as is 2022’s 7th rate hike.
Two pronged opportunity set: non US equity markets and ARKK style thematics as favorable tactical and strategic outlooks begin to converge.
CLIMATE
Russia’s decision to invade Ukraine will force an EU wide decision to reduce its energy dependence on Russia. Germany is most exposed – low hanging fruit includes reversing nuclear plant shut downs. Enhancing energy security while going green gives EU chance for a 2 for 1 win.
ECONOMICS
Understanding and appreciating the distinction between slowing y/y growth, likely in all DM economies this year and slow growth, unlikely in any DM over 2022-2023 time frame, is key to getting the economic outlook right.
Nominal growth across the US, EU and Japan will be higher than pre Covid levels; be careful to distinguish between signal and noise insofar as EU energy price spikes and growth – inflation estimates are concerned.
The inflation bogeyman will shrink as we move into Spring – ebbing Omicron, clearing supply chains, growing production of semiconductor chips, autos etc. should all help. Media narratives of a Fed that has lost control are not supported by 3, 5, 10 yr inflation forwards.
POLITICS
While still very early days the winners and losers from Russia’s invasion can start to be toted up. Pres. Biden is a clear winner – his poll #s are like an ARKK stock, bottoming. Former Pres. Trump is a loser – his comments regarding Putin and Ukraine should disqualify him from the 2024 race in fact if not in deed. Ukraine’s President Zelensky is a winner – his speech as the invasion began should be watched by all – it is a profile in modern day courage. President Putin is a loser – his decision seems irrational and is likely to leave both him and Russia ostracized.
From our Tri Polar World POV the EU is a major winner as Russia drives deeper cohesion and integration across the security and energy fronts much as Covid did across joint fiscal spending. NATO has found a new lease on life while Russia, a petro state, has just kicked its top customer right where it hurts.
POLICY
NATO/US boots on the ground are very unlikely – further sanctions should Putin not reverse himself are quite likely, perhaps to include Russia’s ejection from the SWIFT system.
The Fed has the option of bringing inflation down to 2% by breaking the stock market; its 2nd option is to bring inflation to 3%, declare victory and unleash a multi year period of above trend growth not only in the US but globally. It will choose the latter.
The ECB is highly unlikely to tighten policy in 2022; Europe’s Stability and Growth Pact’s updating will now almost certainly include more spending to bolster defense and energy security. The PBOC continues to provide liquidity to support China’s 2022 glide path.
MARKETS
Where to begin? The ytd selloff would seem more rotational than systemic as non US outperformed the US while Value outperformed Growth, Bonds weakened and Commodities roared. The invasion of the Ukraine led to a final flush and an epic record setting reversal underpinned by an inverted VIX curve and extensive backwardation across the Commodity complex.
The equity bear case – another 15% drop resulting from a Fed that tightens until something (stocks) break – has likely been taken off the table – not only by invasion but the reality that the Fed has not started a tightening cycle with all three major US indices under their 200 dmav in 40+ years.
Our tactical outlook: LTE inflation in the months ahead coupled with BTE growth leaves us fully invested in our GMA and TPW 20 Model Portfolios. OW equity; within equity OW Cyclical/Value in the US and non US vs US. UW FI, especially DM sovereign debt; 2% 10 yr. UST and .20% 10 yr. BUNDs are not attractive. OW Commodities across the complex; hold thru any profit taking. Continue to expect a weak USD.
Two big opportunities: the non US equity space and the ARKK type disruptive tech/thematic space. If we are right on our strategic outlook the current period will be seen as a great entry point – of course only in hindsight by the majority… don’t be in the majority!