As The Tri Polar World Turns: Turbocharging The Tri Polar World

 750 words – a 2 minute read.

EXECUTIVE SUMMARY

Tired of all the inflation, stagflation, inversion conversations? Here is something new.

We introduce Conflict Speed which describes the speed at which a country, like Russia, can be neatly excised from the global economy. Like our prior Speed examples: Covid, Climate, Analytical Speed; Conflict Speed is both simple & profound.

From crisis comes opportunity. We believe that the 3Cs: Covid, Climate & Conflict are turbocharging the emergence of our Tri Polar World thesis, a world where regional integration in Asia, Europe & The Americas is the ordering principle.

Globalization peaked with the GFC; nationalism doesn’t work in the 21st Century – note UK living standards are declining at their fastest pace in over 60 years while Russian GDP is expected to shrink back to 2007 levels in one year. 

Companies are shifting to regional production platforms as global supply chains become unreliable in a 3C world. Tri Polar companies are starting to appear – Tesla is among the first, Taiwan Semiconductor is likely to follow as will EV battery companies.

Europe & The Americas have the most upside to the Tri Polar World. Europe because Conflict speed will accelerate its rate of change across energy, defense, climate & economic policies. The Americas because so little has been done to integrate southward – Conflict speed’s focus on energy and food security suggests this will change.

CLIMATE

Europe can lead the clean energy transition as Conflict speed pushes it far ahead of the other regions. Europe’s energy transition offers a triple payoff: reduce dependence on Russia, reduce carbon emissions and reduce inflationary pressures.

Europe’s energy transition acceleration means that a Carbon Border Adjustment Mechanism (CBAM) is all the more likely in the years ahead.

ECONOMICS

Conflict speed suggests that Govt spending will remain elevated and growth supportive, particularly in Europe but also in Asia with Japan expected to launch a large fiscal package & China having the capacity to do the same. 

Our global cap ex boom theme will clearly get a boost from Conflict speed – cap ex to reorder supply chains, cap ex to mitigate climate risk, cap ex to offset conflict risk, cap ex to build roads, fix bridges etc. Europe is likely to become a demand contributor rather than just a free rider on global demand.

POLITICS

Time is not Putin’s friend across any sphere – military, political, economic. We expect this reality to lead to some sort of ceasefire within a month or so. Ukraine has presented its terms and Russia has shifted its military focus. Russia’s May 9th anniversary celebrations of its WW2 victory has been floated as a possible timeframe.

China made an abrupt verbal shift mid month to support private tech companies and property developers after seeing what “uninvestable” means in 2022. Pres. Xi is playing for big stakes – now its time for action; Covid is spreading  & markets are watching.

POLICY

History is being made on almost a daily bias in European policy circles: from Germany’s about face on Russian gas dependence and military spending to broad EU agreement to spend 2% of GDP on defense to the growing likelihood of joint financing for energy – defense security.

Europe has the chance to not just be a spectator to market action but to shape it. We expect Europe’s policy mix to look considerably different across the energy, defense & economic policy spaces in the coming years, giving it a strong chance to win the 2020s.

MARKETS

A “Golden Age” for asset allocation indeed – the worst quarter in roughly 40 years for US bonds, the best quarter in over 30 years for broad Commodities, the first down quarter for the S&P in two years.

So much ink spilled on YC inversion but so little recognition that the 18 months post inversion produce some of the S&P’s best returns.

We are focused on 4 areas that are the major beneficiaries of the 3Cs acceleration process: European equity – on both a tactical & strategic basis, thematic/disruptive tech, Chinese equity and Gold.

Three of the four areas (gold less so) share the following characteristics: massively oversold, lousy sentiment, cheap valuations and upside exposure to the policy shifts we expect to manifest from the turbocharging of the Tri Polar World.

Enjoy this BTV clip from Monday; I am on from 9 to 9:40. There are several VG segments on the Fed, rates, Europe & more.

LETS GO DUKE!