As The Tri Polar World Turns: The Great In Between
1093 words – a 3 minute read. Full Monthly Attached: 5700 words, 31 charts & tables from over 20 separate research sources.
We remain zeroed in on the multiple transitions we see occurring across risk assets and economies. We focus on 5 transitions in this monthly:
From rate hikes to rate cuts – from a finished Fed to a just getting started EM cutting cycle – inflation is a DM not EM problem - see Chart 15
From monetary to fiscal policy – aka from the Fed to Bidenomics & its EU equivalent see Chart 5
From recession to recovery – aka from late cycle recession fears to early cycle recovery
From equity bear market fears to rotation - aka from Defensives to Cyclicals & Commodities
From the US to ROW - aka from the USD to EMFX
We position for transition by employing barbell strategies across our Global Multi Asset (GMA) & TPW 20 thematic model portfolios.
Global Equity barbell – US & non US with a non US tilt to Japan and EM. Note LA equity OPed the Qs this Quarter. So much for narrow leadership
US equity barbell – Big Tech & Cyclicals – Mr. Market says no recession as homebuilders and transports break out – see Chart 2
FI barbell – US HY and EM local currency debt – PBOC easing now, Lat Am to cut in Q3
Cross Asset barbell – Digital (AI related) and Physical (Copper, Oil); 2nd H should be VG for physical
Thematic barbell – Future Tech and Climate Mitigation – 12 -18 month bases across both
Stay patient, stay invested & BTFD!
CLIMATE
It’s summer time and the solar is cranking…making a difference in Texas as solar now represents 7% of the state’s power production amidst a record heat wave. More to come across the US as the IRA cranks up with an expected 4 M new, good paying jobs in solar and wind alone by 2035 as tax credits make US component production cheaper than China.
Solar is global and Europe is benefitting as well with solar now providing more power than coal for the first time as coal fired generation falls by 1/3 Y/Y. EU on track to build 500 GW of solar power btwn now and 2030. See Chart 9
China continues to lead in almost every clean energy category forcing the US and EU to spend heavily to try and keep up. Fitch expects 17% of China’s power needs to be met by renewables this year, not including hydro.
ECONOMICS
The big question is whether manufacturing will catch UP to services or will services catch DOWN to manufacturing? We see an equity market analogy where the laggards (Cyclicals) are catching UP to the leaders as we move into a bull market.
We expect the same catch UP in the global economic recovery as inventory destocking is replaced by restocking & disinflation boosts real incomes and hence consumption.
We see a desynchronized global economy led by Asia with Japan growing well above potential and China maintaining a 5% growth pace, matched by SE Asia and India as well. US and EU to follow the Asian leaders as suggested by a rocketing Bloomberg US Economic Surprise Index – see Chart 4.
European economic weakness is a concern but solid wage growth, fast declining inflation (Spain under 2% y/y) and record low unemployment should allow it to escape all but a very mild recession.
POLITICS
We have no edge in the great Russian coup guessing game and so choose not to play.
We see the US presidential contest as between the twice indicted (to date) but never shamed Trump grievance platform and Bidenomics as Pres. Biden goes nationwide touting the real time benefits of his multiple legislative wins: Infrastructure Act, IRA which funnily enough top ticked inflation and the Chips Act. Supported by the best job creation & misery index score of any modern President, Biden has much to talk about. See Chart 18
European politics are focused on the right ward swing visible in recent Italian and Greek elections and setting up for the same in Spain’s upcoming election cycle as the pendulum just keeps on swinging.
POLICY
We believe the Fed is done raising rates given June’s headline CPI is likely to be well under 4% and falling rents should cap 2H inflation risk. The UK is a separate case and don’t recommend extrapolating its inflation woes to the rest of Europe or elsewhere.
Watch the BOJ as the end of YCC seems clear given that Japan’s inflation expectations now seem well anchored in the 2-3% range. Japan’s negative rate environment is equity supportive as is the likely AA shift to follow YCC’s end. See Chart 21
Our policy focus transitions from monetary policy to fiscal policy as what the FT calls the global industrial arms race kicks off to deal with our 3Cs: Covid, Climate & Conflict.
Bidenomics & its New Industrial Policy together with the EU’s Fit for 55 and Green Industrial New Deal has the capacity to upend secular stagnation & absorb the global savings glut. (Italy is growing faster than Germany which has a higher inflation rate than Brazil).
Along similar lines, we expect next month’s Chinese Politburo meeting to support China’s shift from export and investment led growth to a domestic demand led economy. China’s consumer confidence has yet to recover from its aggressive Zero Covid policy and visible Govt support seems necessary – see Chart 22.
MARKETS
We remain fully invested (cash one of the worst performers ytd), OW global equity, deeply UW FI and slightly OW Commodities in our GMA model. Rising global EPS estimates support our Equity OW while our early cycle economic recovery view does the same for our FI underweight. See Chart 25
Our mantra remains: Fed on hold = USD weakness = ROW equity OP together with Commodity strength. The Yen could be the catalyst for USD weakness – at a 20 yr. TW low, it is primed to pop once YCC ends.
Commodities are close to 50 year lows relative to equities. We have taken the pain of our Commodity OW ytd and expect to feel much better about that segment by YE as the focus shifts to 2024, recession fears fade, China stimulus is brought to bear and the manufacturing sector picks up. See Chart 30
We enjoyed the juxtaposition of writing the monthly and then going on BTV yesterday morning, having to hone it down to several TV ready sound bites – it simplified writing this Exec summary.
Happy 4th of July – enjoy it with family & friends!