As The Tri Polar World Turns: Who Will Win the 2nd Half of the 2020s?

We distill 7700 words & 25 charts & tables – a nice meld of opinion & data -  into 1135 words – a 4 minute read.

Exec Summary

We stay focused forward and extend our global macro blue sky thesis which covers 2023-2027 to ask who will win the 2nd H of the 2020s.

First, we need to assess who won the 1st H and while we are not yet at halftime the US and its superior post Covid growth performance is our winner. The Biden Admin witnessed the Obama mistake of going too small and went big – big in industrial policy, big in clean energy, big in Chips Act etc. As a result, foreign money has poured into US financial assets.

The AI Age is driving the pace, fueling an Age of Investment and forcing policy makers across the Tri Polar World to act and act now. We see this period as deepening the TPW which provides global stability much as 3 legged stool does.

We believe that governance will play a big role in determine our winner; those countries and regions best able to face reality & integrate public and private investment at scale and with speed with have a big leg up.

We argue that the US faces a fork in the road this November – a Democratic sweep will propel the US & the Americas forward; a Trump return to office boosts the chances for Asia or Europe to win the 2nd H.

Europe needs to build on its success in dealing with Covid & Climate; improve its growth engines, especially worker productivity, deepen its capital markets to fund innovation & create more joint funding vehicles to compete in the AI Age.

Asia is increasingly centered around China as regional trade expands and China goes abroad, boosting FDI to protect its export engine and buy time to rebalance its economy.

It too seeks AI independence and is actively trying to “Delete A” (no prize for    what A means) as it seeks self reliance in technology, aka our 2 tech stack divide thesis.

We believe the next few years will be critical to determine who is best set up to win the 2nd H; its likely to be an interesting few years. We are here for it!

CLIMATE

The fusing of the Digital & Physical realms through the powering of AI factories, aka data centers, has energized the climate discussion beyond the Go Green stage.

Pres. Biden’s recent tariff impositions on China’s green energy exports are more sound than fury but reflect the reality that China too went big, big in renewables over the last decade & more and as such now holds a dominant position across the space – solar, wind, EV, batteries.

Whether that dominance is because of past subsidies (true) oe because of hyper aggressive competition leading to rapid innovation and aggressive pricing (also true) is a moot point. There is a lesson here for Europe & the Americas.

ECONOMICS

Our 4 4 24 macro surprises remain trusty guideposts as we move forward in time with both #1-2, lower inflation and better than expected productivity growth, is playing out. The US productivity lead is widening vs Europe.

Return to Stability, surprise #3 and early cycle not late, surprise #4, manifest in forms of lower financial market volatility as well as reduced macro vol as inflation dampens and growth expands across the globe.

The early cycle debate has been ongoing for years; we look at how global growth is converging, how the semi cycle is expanding, how Asian experts are surging and how both Europe & Asia growth is accelerating suggests early cycle it is.

POLITICS

No shortage of action here whether its Mexico’s first female president, Mr. Modi’s Indian face plant or South Africa’s woes there has been plenty to consider.

And that’s before we discuss the US presidential campaign which will feature a convicted felon in Donald Trump for the 1st time in history. The Republican support for Trump is a denigration of the American system of justice which has stood the test and proven that no one is above the law.

Our view has been and remains that President Biden will win in a landslide and that the chances of sa Democratic sweep are rising. We make the case.

EU Parliamentary elections are under way and will help determine whether EC leader Ursula van der Leyen gets a 2nd term, what the next 7 yr. budget will look like and whether Europe has a legitimate shot at winning the 2nd H.

POLICY

We are in a global cutting cycle with Bank of Canada and the ECB joining the EM leaders. The Fed will come last to the party it seems.

Fiscal policy is the key – which Govts will spend most wisely. Here the US will face a key decision point next year with the decision to extend or end the Trump tax cuts. We go in depth on this issue.

Europe awaits Mario Draghi’s report on how to restore and revitalize Europe’s competitive position in the TPW. As noted the new Parliament will play a key role in determining joint funding for defense, how to fill the investment gap, when does Capital Market Union (CMU) finally move ahead etc.

Japan continues to move away from deflation and on to a new path of BOJ policy with implications for industry & society alike.

China is tracing a wide policy U turn so as to not embarrass leadership. Point is it is making the turn and will underpin the property sector while seeking to boost consumption, reduce dependency in the tech space and protect its export engine while boosting FDI.

MARKETS

Wem remain constructive on risk assets thru YE and beyond. We join Dr Ed Yardeni in sketching out what SPY levels could look like at decade’s end.

We continue to favor stocks and commodities over FI and see double digit earnings growth this year and next across the US, Europe & Asia as underpining that positive equity outlook.

We believe we are early in a secular bull market for commodities driven by both supply challenges in many parts of the complex together with surging demand from the melding of the tech and power worlds.

We expect global growth convergence to be USD negative and expect dollar weakness to provide a leg up for EM assets and the commodity space.

We continue to express our digital and physical world pick & shovel strategy as well as our 2 tech stack divide strategy. We remain significantly OW EM equity and note how EEM stayed relatively flat during the recent Mexico and India equity turmoil.

We noted Europe’s new ATH this week and EAFE’s focus on breaking out to a new 20 year high. The potential for USD weakness to unlock flows into non US assets is something we are paying close attention to.