As The Tri Polar World Turns: The Birth Of The New

Exec Summary

942 words – a 2 minute read. Full doc – 5800 words, 23 charts & tables from 20 distinct sources.

The past few years have felt very sped up – dealing with the 3Cs of Covid, Climate & Conflict in an Age of Speed will do that.

Now we are thru Covid & past the energy shock and attendant inflation spike, its time to focus on what comes next – the birth of the new.

Birthing something takes time, is often messy and can mess with one’s head. After being sped up we now need to slow down & focus on the big picture changes unfolding.

From the new Biden Doctrine to the new nominal growth world to the new industrial policy and on to the new AI inspired global productivity boom, major changes are upon us.

From Climate to Economics to Politics and on to Policy the language we use to describe the new world is in flux – itself signaling the magnitude of the changes. If you know where to look (Tri Polar World) you can see the outlines – IYKYK.

We believe the birth of the new will drive global cross asset pricing and performance though the rest of this decade. Near term we remain focused on the twin rotations: from US Big Tech to Cyclicals and from US equity leadership to ROW led equities.

CLIMATE

In 2023 global renewable power is expected to total 440 GW of installed capacity including a record breaking 107 GW of newly installed capacity led by solar and wind.

Climate mitigation is reshaping the landscape; in the US, Q1 EV related leasing activity was up 100% Y/Y according to CBRE.

We expect Climate related equity investing to pick up as we move past Covid and into the spending cycle unleashed by the IRA in the US and the Green Deal Industry Plan in the EU. Patience.

ECONOMICS

One would never know it from sentiment surveys or media headlines but the S&P global Composite PMI hit a 13 month high last month.

China, pegged to grow in excess of 5% with a Composite PMI well above 50, is rumored to be going into recession. Huh?

In the US, 2022’s main drags on the economy: housing crash, inventory destocking & tech layoffs are all reversing. Housing has clearly bottomed, destocking has run its course and tech, well, AI baby.

Europe’s Composite also remains well above 50 while inflation is falling faster than expected, setting the stage for an ECB pause. Consumer remains robust, banks and corporates as well. Restocking to drive manufacturing across the US and Europe; expect Manuf PMIs > 50 by YE.

Japan’s Composite hit a 10 year high last month as it exits 30 years of deflation while China readies new measures to support the property sector and accelerate domestic demand.

POLITICS

Pres. Biden gets the job done on the debt ceiling – so much feckless fuss and bother for so little. The two Republican frontrunners both support pardons for those tried, convicted and imprisoned for their role in the Jan 6th insurrection. Nuff said.

The US – China relationship now stands at the heart of the world’s geopolitical order – we include several key quotes from National Security Advisor Sullivan on the new Biden Doctrine.

POLICY

The most aggressive rate hike cycle in 40 years approaches its end game to be replaced by an EM led rate cutting cycle.

We focus on the Fed’s June update of its 2023 and 2024 US GDP estimates. Much as the EC recently raised Europe’s growth forecasts and Japan has done the same, we expect higher Fed growth estimates to put paid to US recession fears & kick off the equity market rotation we have been writing about.

We are quite excited about the new global growth profile manifesting across our Tri Polar World as public private partnerships drive regionally focused investment spending while AI provides a productivity accelerant.

MARKETS

Big Tech has crushed the field over the past month leading to worries about narrow breadth (unfounded); big tech has an AI moat, is no longer at risk to rate hikes and is recovering from last year’s brutal bear market.

It is also overbought and needs a rest – a rest that will provide space for the rotation to the Cyclical sectors to pick up the baton and take the S&P above 4300 and into bull market territory, joining the Nasdaq. We continue to focus on the 2H of the 1990s analogue.

We have deployed a barbell strategy in our GMA model both for our US equity allocations (Tech – Cyclicals) and our global equity allocation (US – ROW). As we have since last Fall, we remain OW equity, OW non US DM and have been enjoying the twin barreled EU – Japan run.

Our TPW 20 thematic model utilizes the same barbell model with Future Tech on one side and Climate focused opportunities on the other.

In FI we agree with McKinsey which has laid out a 4% rate world with 3% inflation (our Middle Path thesis) and 1% real to get to 4% nominal, about where we are now. We remain UW FI and OW Credit and note the reopening of the US HY window.

USD rally and hedge fund selling have punished our Commodity holdings across the complex. We see it as more of a destocking than a physical demand collapse and note April’s record China oil demand and May’s WTI price collapse as incongruent. GS calls for 30% GSCI 12M upside in a no recession environment – clearly worth playing for.

Fed on hold = USD weakness = ROW equity/Climate/Commodity Outperformance = patience people, patience.