As The Tri Polar World Turns: The Past Is Not The Present, The Present Is Not The Future

EXEC SUMMARY – We distill 6600 words & 30 charts from 20 sources into 1300 words & a 3 minute read. Full doc below.

We are moving at speed as a society, a speed that is hard to keep up with, that quickly winnows winners & losers, a speed that devalues the past, barely allows for the present & requires the embrace of the bleeding edge future as the default state.

We are entering a new macro regime highlighted by a return to macro stability (macro surprise #3) that leads to the recognition that we are entering a new growth cycle (macro surprise #4 in our 4 for 24 set up). 

Early cycle evidence is piling up: semi cycle turn, unseasonal strength in homebuilders, ISM Manuf new orders breaking above 50 for 1st time in 16 months. We leverage BofA’s global cycle work to reinforce our POV.

We expect the next several years (2024 – 2026) to be good ones supported by the nascent global rate cutting cycle, the incipient global liquidity cycle & a robust earnings cycle. We marshal our global cap ex boom thesis, global supply chain regionalization construct (aka Tri Polar World) and 2nd H of the 1990s US analogue in support. See Charts 1-3.

We argue that should former Pres. Trump make it on the ballot he will lose in a landslide to Pres. Biden.

We remain constructive on risk assets with a focus on EM debt & equity together with Commodities.

We have some fun utilizing college and pro football examples of how our games as well as our lives and daily work are being transformed into something new where forward focused, blue sky thinking adds value.

CLIMATE

Clean energy spending is exploding yet clean energy stock prices are imploding – how does one square the circle?

China leads the clean energy space; it’s the biggest spender by far (spending as much as US and EU combined) that has seized the high ground across solar, battery and EV spaces. See Charts 5-6.

China’s mercantilist approach towards clean energy exports is running into EU & US domestic production and security concerns, creating deflation at home & angst abroad.

Fossil fuels are fading – solar & wind now provide more US power than coal, Saudi Aramco is shelving oil field expansion plans, OPEC sits on 3-5MBPD of capacity (which is why Houthis are just more spilled ink).

ECONOMICS

Our 4 for 24 macro surprises continue to serve as great guides. Surprises 1 & 2, lower inflation faster and rising productivity are playing out across the US and Europe. We expect EU CPI to break 2% by late Spring; US already there for the most part.

Our real focus now is on surprises #3 & 4; the return to stability and recognition that we are early cycle not late. Both the pre Covid & Covid eras are in the rear view mirror (see the VIX and MOVE indices). The past is not the present, let alone the future.

What’s next is likely to be a period of low volatility, BTE growth and moderate inflation. Such an environment should be good for risk assets, underpinned by the Trillion-dollar reward unlock as the MMF mountain starts to roll off into risk assets.

BofA’s global proprietary work supports this thinking; its Global Wave, which quantifies global economic activity trends, has troughed after a record 25-month downturn. What typically follows is a “sustained global upturn that lasts two years on average”. See Chart 14.

POLITICS

We make the case that should former Pres. Trump even make it on the ballot he will lose in a landslide to Pres. Joe Biden.

Geopolitical risk is #1 in BofA’s risk poll and US election risk is #1 among geopolitical risks. Thus, our focus. We believe growing recognition that Trump is past his sell by date should provide further support for risk asset appreciation.

To hold his base, Trump’s rhetoric is such that NH independents broke 61% - 37% for Haley, suggesting no big Trump tent. Haley has flipped the script, captured the energy & made Trump the butt of jokes rather than the jokester.

Pres. Biden continues to notch up wins across the economy, jobs, record high stock prices, rising home prices etc. Consumer sentiment, which ties closely with incumbent success, just had its best 2 month jump in 30 years. Biden’s timing could be stellar – his $117M in campaign funds on hand is a record for any Democratic nominee at this point in the cycle.

POLICY

We continue to think it’s WHY the Fed will cut rather than WHEN that counts. Disinflation that leaves real rates overly restrictive thus leading to rate cuts is a very positive environment for rising stock prices.

We are early days in an EM led global rate cutting cycle. This week Brazil, Colombia & Chile cut rates – all began their cutting cycle last year.

The ECB will also enter the rate cutting cycle this Spring; we focus on Germany whose past is unlike the present and whose future requires a makeover.

The bulk of policy action will be in Asia as the present supersedes the past & the future beckons. We expect the BOJ to exit NIRP and YCC this Spring – waiting till inflation is falling  (check) and the Fed cutting (soon come) in order to modify the JGB reaction function.

China continues to bedevil those like us who are long what BofA calls the ”world’s most contrarian trade”. Bloomberg notes that in January alone there were 8 separate policy announcements designed to help stabilize the property sector and boost consumer confidence.

China’s 5% growth rate both precludes massive stimulus (we agree) and suggests that small bore stimulus will likely catch fire at some point – evidence is growing that the property sector is bottoming (Evergrande bankruptcy is lagging indicator).

MARKETS

Wall St’s many mea culpas for getting 2023 so badly wrong on both the economy (what recession) and the stock market (SPY up 20% vs prediction for a down year) helped prompt our title.

The near 20% run up over the past three months is rare and usually comes at the beginning of recoveries not going into recession. We note that the 4 for 4 lineup seen last Fall: favorable seasonality, sentiment, positioning and technicals have reversed for the most part leaving us cautious NT on US equity & looking elsewhere for action.

We remain constructive on risk over the coming 6-12 -24 months believing that growth, inflation, policy, liquidity & earnings are all lining up in investors’ favor.

We continue to focus on Small Caps across DM, EM debt & equity as well as Commodities as areas of opportunity & note that Comm OPed stocks & bonds last month. We remain OW across the Comm spectrum from energy to gold to copper to uranium as supply issues meet growing demand.

We remain OW equity and UW FI with a Credit focus as well as EM LC debt. We do not see big upside in UST and expect yield buyers to continue supporting DM credit.

We push back against the Magnificent 7 concentration and 1999 analogies, noting the Russell 3k just hit a new ATH while pointing out Nvidia’s valuation collapse as its earnings soar. See Chart 26.

We highlight the 16 yr. cycle of US equity OP vs the ROW; note EM equity trading at a 50 yr. low vs US equity & highlight both European equity’s record 33% valuation discount to the US & China’s record 50% discount to ACWI. Value traps all? Time will tell – the Present is NOT The Future. See Charts 27-30

While we talk football in the monthly, its hoops season and tomorrow brings Duke – Carolina… I’m liking our Blue Devils no matter the season… GTHC, GTH!!!!