Lean Into Complexity

1865 words – a 5 minute read.

We are big believers in having a framework & a process to stay anchored to what’s important in the everchanging world of global macro investing. Our framework is in our name – The Tri Polar World; our process is one of writing weekly, doing a deep dive monthly and updating our two model portfolios, our Global Multi Asset (GMA) & TPW 20 thematics, once a month.

Our framework has evolved since we first wrote about it roughly a dozen years ago. It continues to guide us well – most recently helping us think through the positive implications of regional deepening on both the infrastructure & EM equity front. As such we have recently added to our infrastructure allocation and currently have EM equity allocations in each of our three main regions: Asia, Europe & the Americas.

We note Mexico’s Nov Manuf PMI of 52.5 vs US well under 50 and further note Poland’s Q3 GDP growth of 1.3% as being the EU’s best. We believe regional integration in our three main regions will build global resiliency & hence help drive macro stability (macro surprise #3), provide tremendous growth opportunities (early cycle) and draw EM closer to their developed market neighbors (equity upside).

Our process can occasionally lead to some sharp insights (in our opinion). We enjoyed just that this week as we went through our model portfolio updating process. It’s essence lies in todays title – we want to lean into today’s complexity that many resist and some even fear. Of course, if one has spent 30 years as we have doing global macro investing – complexity is something to be embraced, not feared. It can provide an edge, particularly for a boutique operation such as ours, one not beholden to multiple constituencies or forced to blend multiple, diverse, cross asset and economic views into one homogenized “Firm” view.

Global macro almost forces one to simplify – get the big picture right & the rest will follow. From simplicity comes clarity, especially amidst complexity. Simplicity can generate edge and edge outperformance.

November’s sharp cross asset rally, which our clients have fully participated in while both smart (HFs) and dumb (retail) money got it completely wrong, is the latest example of market edge. Retail, for example, sold record amounts of equity last month. HFs, CTAs have had a very poor year relative to ACWI or the SPY. Another manifestation of this edge came about in the 2024 Outlooks we all have been forced to read over the past few weeks. We got ours out early (5 weeks ago) in order to preserve our own voice & POV rather than digesting & regurgitating the views of others. 

On the macro edge side, we are reminded of the evergreen recession calls so many have made for so long. Yet somehow the same voices, who have been wrong for 18 months or more, are welcomed back in the media storm to give their views yet again.  In our case, we have highlighted the “Middle Path” between high inflation and deep recession for 18 months or so and never called for a recession.

We are big football fans, both college (Go DUKE!) and pro. The inherent complexity of high level football is something we have been increasingly drawn towards. At the pro level its been very exciting to see how every player and every inch of field has become active. While the field is fixed, the personnel is not and so player motion has become a huge factor in creating an edge for offenses and forcing defenses to react, to lean into the complexity or get blown out. Some franchises get it and some don’t. Being a very meritocratic system those that do win, them that don’t get fired.

At the college level, its the off the field complexity that is escalating and separating the best schools/programs from the rest. Here of course one thinks about the transfer portal where kids can change schools and play right away, coupled with the advent of NIL (Name, Image & Likeness) which allows players to get paid for their NIL. Both have changed in the past two yrs., radically reshaping college sports, especially the two main money sports: football and basketball – of which football generates much more revenue via TV contracts.

The melding of these two nascent changes are forcing college athletic departments into a world of complexity & speed that they have never previously encountered. Success lies in deepening collaboration between the football coach, the player, the athletic department and the collectives developing the NIL opportunities. Some schools embrace this new landscape, this speed & complexity – others flinch or balk. The winners will be easy to determine – they are the ones leaning into complexity.

Ok so what does this have to do with investing – asks the non football fan. Fair enough. What’s boosting complexity and speed in the investment game is the growing reality of ever increasing amounts of information/opinion (evergreen recession) and how that makes the job of outperforming/beating one’s BM harder, not easier. To wit, only 40% or so of active managers are OPing YTD (cash drag).

More information, more readily available, does NOT make it easier to succeed. It makes it harder, harder to identify the signal from the noise, harder to know who to trust, who to rely upon. As we have noted previously, it also makes the past even less valuable as a guide to the future. So many of the evergreen recessionistas were big firm folks taken in by their slavish use of historical models during an ahistorical time. Duh.

Rather than look forward, they looked back. Here’s a hint. Don’t look back – ask ChatGPT and focus forward. AI has massively devalued the utility of spending time looking back. It has likewise increased the utility of those who can look forward and sketch a path into the near future, who can identify the signal from the noise, who can leverage that knowledge into a macro framework (Covid Speed, Middle Path, 4 for 24) and from there into a portfolio strategy or asset allocation.

That’s our game and we love it. As we look into 2024, we expect to see our 4 for 24 macro surprises unfold: lower inflation, sooner than expected ( US durable goods deflation anyone); rising productivity (US Q3 nonfarm productivity final # 5.2%, best since 09), the return to macro stability (easing financial conditions anyone) & an end to the late cycle, evergreen recession vs early cycle, global economic recovery debate in favor of those like us, the very few, the early cycle camp. Folks still can’t wrap their head around the return to stability thesis: here’s a representative POV from JPM: “We expect the VIX to generally trade higher in 2024 than in 2023 given high rates, slowing growth, a challenging backdrop for stocks, and elevated geopolitical risks”. We’ll take the under.

Thus, we remain constructive on risk assets into YE and 2024. Things move fast these days – we have focused on SPEED as an investment concept since the dawn of Covid. In the past month alone, we have witnessed the fastest ever CTA swing from sellers to buyers according to GS coupled with the fastest ever swing from bears to bulls in the AAII investor survey (bears now lowest since 2018). Some equity & bond market digestion here makes perfect sense.

We considered all this and more in our monthly portfolio meeting while also digesting insights gleaned from our technical chart run thru for all our holdings, all our BM indices and any new ideas under consideration. No surprise that the technical picture for our models was much improved with the vast majority of our holdings back above their 200dmav for example.

Most of the equity landscape globally including ACWX and EEM are back above that key level while cross asset wise AGG is flirting with its 200dmav while GSG, the Commodity index, remains well below its 200dmav, dragged down by an oil selloff entering its 7th week (HF net short most since June). With bonds extended and commodities O/S we did not have much to do in either space within our Global Multi Asset (GMA) model.

Our positive 2024 outlook led us to add some risk in select areas such as European small caps where we initiated a position, expecting both US and EU small caps to benefit from growing stability, lower rates and improved risk appetites. With the US Tech/SC spread the widest ever according to Barchart, wider even than in Dot Com Boom & Russell 2k hitting its most extreme O/S level ever we think there is opportunity in the SC space on both sides of the Atlantic.

We also decided to reshape our China equity exposure – we have been bullish and argued that it is among the more compelling global risk reward trades. We remain of this view (MSCI China down 3 yrs. in a row – doubt it will be 4) but also have to recognize its significant UP last month when most everything was rallying.

That is not a good sign and suggests it may take longer for this opportunity to unfold – as such we shrunk our OW. Part of the challenge is a real lack of domestic investor confidence coupled with a record 4 months in a row of foreign investor selling. Why not just cut the whole position and take the loss? Here’s Barchart: “Chinese Stocks are trading at all-time lows against Emerging Market Stocks just as EMs are trading at 50-year lows against U.S. Equities.” We doubt we can pick the bottom so resized to something we are comfortable with.

In our US equity sleeve we added to our infrastructure play as noted above. We observed that Brookfield Infrastructures Partners (BIP) just closed its biggest ever infra fund at roughly $25B. We also added to our Cloud position in our TPW 20 model while initiating same in our GMA model. We were heartened to then see the folks at MRA Advisors come out with positive comments on the space, noting the same “massive base” we highlighted in our work. We see the Semi and Cloud spaces as the two most immediate winners of the AI age.

This massive base concept, reaching back to 2021 in many cases within the EM, thematic, even tech spaces (Qs flat over 2 years, SPY the same), coupled with our outlook for macro stability and the resultant trillion dollar reward unlock view (MMF) suggests we could be on the cusp of several years of quite good risk asset performance. This is especially true among laggards like EEM down roughly 20% over last 2 years. Future Tech & Climate sit in the same camp; ARKF, for example, is up roughly 75% YTD but down 40% over the past 2 years.

To capture such opportunities, we want to lean into complexity. We also want to welcome new HC Manny Diaz to Duke Univ. We are in it to win it with Duke’s collective, the Durham Devils Club (DDC) & TPW Advisory… college football and global markets – who said life wasn’t grand?

Enjoy last week’s video where I walk thru the Monthly: On Track .https://www.youtube.com/watch?v=ldN-tT_nE98