As The Tri Polar World Turns: What Just Happened?

We distill 5k words & 18 charts from a dozen sources into 1245 words & a 3 minute read.

The market action of the past few weeks remind us of the old adage: if it were easy, everyone would do it. It aint and they don’t.

We see two possible explanations for what just happened: a market based risk off unwind led by systematic funds that required selling both the short yen & long tech positions.

A second option would be a fundamentally driven selloff as investors sense that the Fed is behind the curve and the US economy is rapidly weakening if not already in recession.

We are partial to the 1st explanation given the lack of support for the 2nd. We read the US jobs market as solid, the consumer as healthy & credit markets as open & robust.

Our Global Risk Nexus (GRN) work has come in handy, looking as it does at the state of global play across Economics, Politics, Policy & Markets. It informs us that volatility has popped in both markets and politics but not in economics or policy.

A close read also suggests that political volatility of this type (VP Harris’ explosion out of the blocks like she is fusing politics & the Olympics), is bullish for our global blue sky macro outlook.

Perhaps most importantly, Q2 Earnings are robust across the globe with JPM noting BTE results across the US, Europe & Japan. Critically, 12M forward earnings estimates continue to be revised UP with both the US and Asia expected to show double digit EPS gains while Europe presents single digit gains. Not recessionary.

When we combine all the above with the history following VIX spikes (+ 15% on average for SPY 6M later, +30% on average 12M later) we want to remain constructive on global risk and would look to the Commodity complex, US Small Caps, Tech & Japanese equity as areas for fresh money.

CLIMATE

It’s been a real case of Dr. Jekyll and Mr. Hyde with Dr. Jekyll reflecting the explosion of installed renewable energy across the globe coupled with Mr. Hyde representing the profit sapping excess capacity across the renewable space.

There are two pieces of good news to highlight. The first is incipient signs of rationality amongst China’s leading solar companies as capacity begins to be cut back. The 2nd is the onset of a global rate cutting cycle that should provide support for the thematic space including clean energy.

ECONOMICS

Stability reigns in macro econ land. Q3 US GDP forecasts call for 2.4% GD growth (GS) while Q2 GDP suggest pick ups in both Europe & Japan. Inflation volatility continues to decline while job markets remain robust.

Our 4 for 24 global macro surprises continue to serve us well as guideposts. Surprise #1, lower inflation, sooner than expected, remains on track on both sides of the Atlantic, underpinning the global rate cutting cycle JPM expects to be the most synchronized in 40 + years.

Surprise #2, better than expected productivity growth, has manifest nicely in the US & is the secret sauce that serves up continued earnings growth in a 2-3% GDP world.

The Return to Stability, surprise #3, has been spot on until the past few weeks & remains intact on the inflation front. We expect the VIX to return to the 20 level and below (19 is historical average) in fairly short order.

Early cycle not late is surprise #4 which girds our global macro blue sky outlook for 2023-2027. It is supported by the global rate cutting cycle, by full employment across the US and Europe & a global manufacturing pick up supported by sustained public private investment spending on AI, Infrastructure, Climate & Defense across the Tri Polar World (TPW).

POLITICS

The masterclass of political strategy & tactics demonstrated by Pres. Biden in virtually every aspect of his decision to not seek another term has completely upended the Trump campaign as the convicted felon stumbles to provide a response to the energy and enthusiasm of the Kamala Harris campaign.

The Trump team is on the defensive for the 1st time with JD Vance likely to go down as one of the worst VP picks of all time. The contrast between the Harris - Walz team bringing the joy and the truculent, toxic masculinity filled, misogynistic, racist and ultra hypocritical Republican ticket is as stark as night & day.

It is showing up in every facet from fund raising to volunteers to rally crowd sizes and on to polling with most polls now showing Harris ahead nationally, across the swing states and in the Electoral College. Harris is polling 46% white voter support; if sustained thru the election that would be the highest since Jimmy Carter way back in 1976.

We are bringing back our original Biden now Harris landslide call which we retired after the debate. We see a rising likelihood of a Democrat sweep which would end Trumpism and ensure the continuity of the uber successful Biden economic policy mix.

POLICY

The sharp contrast between a continuation of the Biden policy mix – public private spending across the Chips Act, The Infrastructure Act and the Inflation Reduction Act & the Trump tariff raising, tax cutting, deficit expanding, inflationary & potential dollar crash chaos agenda couldn’t be starker.

We note the bulk of the actual shovel in ground spending from the above acts will come in the coming few years; something that is also true in Europe with the bulk of Next Gen spend coming in 2025-2027.

Asia is also likely to experience a significant investment led growth pick up as Chinese companies go abroad to dominate the Global South.

MARKETS

Over the past 3 months ACWI is flat, AGG is up 3% and Commodity complex (GSG) is down 5%. In the macro econ space inflation & rates are down, growth and earnings are up. Sounds pretty good right?

On a go forward basis investors can expect Central Banks to have their backs, cutting rates at a time when savings pools, whether it be the US Money Market Mountain or the surge in Chinese Covid & post Covid savings or the yen notes in Mrs. Watanabe’s purse, available   to move into global risk assets is deeply underappreciated.

As we look into YE and 2025 we see rotation not recession, opportunity not downside. We remain OW equity and Commodities, UW FI; given our global growth outlook a 4% 10 yr. UST rate is not that appealing.

We see a lot to like on a 12 M forward view in the miners space across copper, uranium and gold. Ditto for our pick & shovel play in the semiconductor space as well as our 2 tech stack divide thesis and the opportunity in China tech. We note China has been a relative safe haven over the past month.

Pull backs & corrections are always painful ST but useful LT as they clear out the excess sentiment (check), restore  balance to the markets (in process) & provide opportunities for new money to be put to work (ongoing).

Credit remains our FI go to in both US and EM and we see no reason to change our POV especially as the global rate cutting cycle gets going in earnest, thereby showcasing the higher yields on offer in the credit space.

Japanese equity has been massively oversold, the US small cap rotation has been interrupted not reversed & the USD looks like it has seen its high for this cycle.

Stay the course.