As The Tri Polar World Turns: The Manifestation of the Tri Polar World
1250 words – a 3 minute read.
Exec Summary
Excited to share our first Tri Polar World (TPW) update piece in roughly 2 years, complete with 6800 words, 31 charts from 22 different sources. Our own IP, developed over the past dozen or so years, the TPW represents the framework through which we view the globe.
We have worked hard to focus forward in our recent work; this monthly ties a lot of that work together. It’s no longer just the 3 Cs of Covid, Climate & Conflict that drive regional integration in Europe, Asia and the Americas.
It’s supply chain regionalization, the semi stack, the EV battery/production chains, the early cycle nature of the global economy, the blue sky potential that stems from our return to stability theme (macro surprise #3 in our 4 for 24 macro surprises).
It’s the AI Innovation Age – the latest tech driver to regionalization with implications for every country, company and consumer.
We push back against the deglobalization bears & argue that the TPW represents a more stable and secure structure – a 3 legged stool that is more robust for each country, region and the globe as a whole.
We highlight the European push for common funding of its defense needs & Asia’s drive to develop a more robust, region based, semi production process bringing together Japan, SK and Taiwan. We note the facts on the ground represented by the Canadian Pacific Kansas City Railroad & its 20,000 miles of rail stitching together Canada, the US and Mexico.
We argue that the TPW structure is manifesting in real time, that it will increasingly be seen as the globe’s operating system & that it is investable today via EM equity, EAFE Growth, Commodities & Thematics.
CLIMATE
The clean energy space remains very challenging from a public market investment POV. From solar to wind, Lithium miners to EV producers, its been ugly.
BYD continues to push the pricing envelope in China with its latest pricing salvo taking aim at ICE vehicles for the first time under the slogan: “Electricity is cheaper than oil”. BYD may be turning into a TPW company as it discusses setting up production platforms in Hungary, Mexico & Thailand. (We noted Tesla as a TPW company some years ago)
We discuss the evolution of the EU carbon market into a beta play on industrial production and highlight the timing challenges between the selloff over the past year and the expected out year price.
We close on a positive note as the entry into Climate related commodities by smart money folks like Elliott and Apollo suggest prices may have reached levels that spur consolidation.
ECONOMICS
Our 4 for 24 macro surprises continue to play out nicely. We remain very focused on our early cycle thesis, an incipient global manufacturing up cycle and rising productivity.
We highlight continued improvement in BofA’s Global Wave work quoting “circumstances in many ways, are reminiscent of the coming out of recession times”.
On the global manufacturing side BofA notes that the breadth of countries with PMIs above 50 has improved from 25% in Sept to 40% today. It reports that PMI upcycles last on average 22 months, providing further support for our blue sky through 2025 outlook.
Productivity wise we dive into the total factor productivity space and note its most recent quarterly growth of close to 5% vs 2H 2023 Labor Dept productivity growth data at 4%. Both of course are very strong #. Our analogue here remains the US in the 2H of the 1990s with the caveat that this time its global.
POLITICS
Geopolitics remains investors’ #1 risk and the US presidential elections remains #1 within geopolitics.
On one hand former Pres Trump is likely to sew up the Republican nomination; on the other Nikki Haley is bleeding him, he continues to underperform his polls, confronts a solid bloc of Republican voters who won’t vote for him and faces an epic cash crunch with a RNC that had its worst fund raising year in twenty years last year.
Pres. Biden has raised more money than any Democrat ever for this point in the cycle, has a unified party, presided over record breaking stock market and jobs market while leading Independents 2:1 vs Trump.
We continue to expect a Biden landslide.
In Europe we support the 2nd term aspirations of Ursula von der Leyen who has put to rest the old joke about who do you call in Europe during a crisis.
In Asia we await the outcome of China’s Two Sessions and hope for continued policies to support consumer confidence which remains in the doldrums leading to roughly 3% of Chinese GDP in Covid related excess savings that have yet to be spent.
POLICY
The most important policy point is the pricing out of 3-4 rate cuts by the US bond market without any negative impact on US equities which reflects the strength of this equity bull market.
We have gone from expecting 7 rate cuts in December to 3 now, right in line with the Fed dot plot. Meanwhile equities are up 20% + as we transition from rate cut dependency & multiple expansion to an earnings driven bull market.
We digest the impact of the US fiscal drive post Covid and how it has positioned the US as a unique performer relative to its DM peers. We believe the impact of the fiscal support during Covid coupled with the investment spending on Infrastructure, Chips Act etc. continues to pay big dividends in the US.
We note that Europe’s fiscal push post Covid is entering its prime impact years; the EU’S Recovery & Resilience Facility has disbursed just 1/3 of its funds to date. 2024 – 2026 are the capital intensive years.
MARKETS
We remain constructive on risk; OW equity, OW Commodities and UW FI, especially DM sovereign bonds – essentially the same asset allocation we have had in place since mid 2022. We want to be exposed to both the Tech leaders & the SC laggards, US Cyclicals, EAFE growth & EM debt & equity.
We continue to push back against the simplistic argument that says we are in a bubble akin to 1999 – 2000, noting that the Mag 7 trade at a PEG ration of 1.1 vs 4x in 1999.
We continue to watch the USD as a possible catalyst for an EM equity breakout coupled with a Commodity up cycle. We have written extensively about China so wont repeat ourselves but suffice to say we remain long. Our TPW related EM equity positions in Mexico and Poland remain in place.
We are watching the copper- gold ratio for a break out and note that smart money is starting to look into climate related based metals like copper (See Elliott, Apollo etc.). This reminds us of a few years back when PE firms like KKR started to get excited about Japan and look where we are today – new ATHs.
We note some real action in the thematic space, particularly in BTC and Biotech, both of which are breaking out and following in the footsteps of fintech. That these breakouts are occurring with rates backing up is another signal of strength.
We remain of the view that our early cycle, return to stability, blue sky themes, underpinned and supported by an EM led rate cutting cycle, abundant global liquidity, robust earnings and the TPW global operating system, should provide continued support for global risk assets.