Time Travel

1555 words - a 4 minute read.

Sometimes it takes a while for things to sink in; we find this to be especially true when writing the Monthly. It is a big lift and often the more important insights come after it is done rather than before.

Today’s insight is how our latest Monthly: The Shape of Things To Come fits as a body of work emanating from prior efforts stretching back to the summer of 2022 when we laid out our Middle Path thesis of a pathway between high inflation and deep recession. We followed our Middle Path thesis with our 2024 Outlook: Surprise, Surprise  written almost six months ago now.

Currently, we are focusing in on our 2023 – 2027 blue sky global macro outlook detailed in the monthly. We remain relentlessly focused forward & see our process as one of stepping into the future, time travel style, one foot at a time, using our 4 for 24 macro surprises as guideposts. 

Quotes like this one tell us we are on the right track: “In a recent FT interview, Uchida said Nissan needed partners such as Honda to acquire scale and share costs. “We need to move drastically faster. I don’t know half a year or a year later what could happen to the industry.” 

Macro surprise #1, lower inflation, sooner than expected, is on track in the EU with inflation running at roughly 2.5% or so, setting up the ECB to cut rates ahead of the Fed in June. US inflation, as we all know, has been bumpier, with the past few months coming in hotter than expected. We continue to see a downward path for US inflation, driven in part by surprise #2, better productivity, but remain much less focused than most on the Fed and how many times it will cut.

As we wrote some two months ago in Handoff, our focus is on the transition from a rate dependent equity market to one focused on the economic growth and earnings narrative. We note that 10 yr. UST rates have backed up some 50 bps or more since YE and yet the S&P is up roughly 9% and ACWI up 7% YTD while Commodities lead up 13% while AGG lags down 2%. Stocks are not moving on rate hopes or fears but on BTE economic growth and earnings. 

We remain happy to trade rate cuts for earnings growth. We will see in the coming weeks if this view prevails given the start of Q1 Earnings season. Consensus calls for 4% US EPS growth while Citi notes that earnings upgrades have beaten downgrades YTD. We are impressed at how well the equity market has moved ahead, shifting gears from the AI, tech led, Magnificent 7 to a much more cyclical and commodity driven advance as several of our other surprises, especially #3 & 4, return to stability and early cycle not late, have begun to manifest. JPM notes: “Global economic data has been exceeding expectations at the highest rate in over a year.”

Our Tri Polar World (TPW) framework has evolved along an even longer time frame, superseding by a decade or more the Middle Path thesis. What’s so cool about the TPW framework today is that it is truly manifesting in real time  just as we wrote just a month ago.

Today is a perfect example of that real time manifestation – we noted at least four articles focused on multiple companies from different parts of the world, investing heavily in the three main regions of Asia, Europe and the Americas. These all follow Monday’s news regarding TSMC’s massive US investment aided by US Govt support via the Chips Act. Other Chips Act recipients include Intel, Micron and Samsung.

Today’s stories included Volvo’s expansion in Mexico to sell into the Americas, Volkswagen’s expansion in China to maintaining its competitiveness in what is fast becoming the world’s most competitive auto market & Fujifilm investing billions in the US and Europe to compete in the health space.

Supply chain regionalization and regional integration serve to reinforce our positive multi year view of BTE global economic growth driven in large part by a cap ex boom funded by public and private investment across the TPW’s three regions to compete in semi production, EV & Batteries, AI, defense, climate mitigation etc. The list goes on and on.

It will be regional because no one country can do it all; regional because companies are making it so & regional because national Govts need to step up together to ensure they have a seat at the global table. It will be regional because a three legged regional, TPW, global operating system is much more stable than a world dependent on the US consumer or Chinese stimulus.

Next week is one of the biggest macro weeks of the year – the IMF and World Bank annual meetings in Washington DC. While both institutions could be said to have lost their way, the meetings still bring a horde of big thinkers and policy experts to DC.

The IMF head, currently Kristalina Georgieva, sets the stage as a starting point for the discussions. The FT reports her takeaway comment as such: “in an address to the Atlantic Council on Thursday, she added that, without measures to boost productivity and lower debt burdens, the world faced “a sluggish and disappointing” decade, which she labelled the “tepid twenties”.

It reminds one of the takeaways from last year’s conclave as conveyed by a buddy who has gone for some twenty years in a row. He noted that the pessimism and negativity was off the charts, by far the most negative he had ever seen.

The resulting numbers are not pretty for the nattering nabobs of negativity with ACWI up roughly 18%, GSG up 11%, cash -1% and AGG down 4% over the past year. We view these meetings and their conclusions as about as good a contrary indicator as the famed Economist covers or the Davos Man conclusions; all of which serve to remind us that bears sound smart but bulls make money.

Far from the “tepid twenties” we join Dr. Ed Yardeni in the “Roaring 20s” camp. The analogue for our global 2023-2027 blue sky period continues to be the US circa 1995-1999. As we move deeper in 2024, analysts have introduced their 2026 US EPS estimates with consensus at $302 suggesting three straight years of roughly 10% EPS gains. The WSJ notes: “Only twice since the 1980s have companies managed double-digit earnings growth for three years in a row when they aren’t recovering from a recession. Those occurred in the Goldilocks years of the mid-1990s and the mid-2000s.”

What does this all mean for investors? We just concluded our monthly model portfolio meeting where we review the technical charts of all our positions, benchmarks etc. We find the interplay between reading the fundamental tea leaves and viewing the charts to be a useful part of our process - one that keeps us grounded as we peer into the future.

We had four takeaways from our chart review: First, the global equity market has completely worked off its overbought condition, with only three of our 30 Global Multi Asset (GMA) model positions in O/B territory. Second, the vast majority of our charts look good with only one of our positions under its 50, 100 and 200 mav. Third, Commodities continue to lead with the GSG pressing up against its 2023 high around $23 – a perfect spot for it to take a break and help cool off the brush fire of inflation fears. Fourth, and to that last point, AGG broke down below its 200dmav support level yesterday ($96.5) suggesting that rates will remain at risk of going higher. That in turn calls into question our weak dollar POV which we have held for some time – a view hasn’t worked (yet).

We also noted that both commodities and EM assets have the most room to run before getting back to ATHs vs ACWI at new ATHs and AGG in the dumps.  As noted in the Monthly, we want to focus on these spaces for the biggest upside should our multiyear, blue sky outlook materialize. 

We are increasingly keen on the idea of an AI – Comm barbell tied to AI’s energy needs coupled with the potential for China to support both broad EM and Commodities. Over the past year EMXC is up roughly 16% while EEM is up 4%. We note that both GS and MS joined JPM in raising their China GDP estimates this week.

Finally, we observed that KWEB, our main China play, has broken back above its 200DR level right around $27. It did so during the stock selloff that accompanied the US CPI data release, showing good relative strength. Over the past one-month, KWEB is up roughly 8% vs the Qs down slightly and SPY up less than 1%. The 2 tech stack divide (China, US) we described in the monthly is a major theme that we think will play out in KWEB’s favor. 

Likewise, Bloomberg reports that: “The Hang Seng China Enterprises Index gained 2.1% on Wednesday, taking its advance from a Jan. 22 low to more than 20%. The gauge has entered a so-called technical bull market for the first time since China scrapped Covid controls in late 2022.”