TPWIM CIO Jay Pelosky speaks at UTIMCO: “The Evolution of the Tri Polar World & Its Implications for Global Asset Allocation”

I was fortunate to be invited to Austin, TX in mid October to speak at UTIMCO, which oversees investments for The University of Texas and Texas A&M Systems (over $45b). Below are my talking points which lay out the Tri Polar World framework in the context of the 3Ts: Trade, Tech and Turbans (sanctions).

NOTES FROM SPEECH:
Thank you for the opportunity to speak at your Lunch & Learn program & a special thank you to Scott Slayton for being the catalyst for this talk. Scott and I have known each other for many years going back to the last century when we were both at Morgan Stanley.

Today I would like to spend about 30 minutes or so walking through my Tri Polar World (TPW) thesis before opening it up for your questions and comments. I will focus on:

•    TPW HISTORY

•    TPW INVESTMENT APPLICATION – BREXIT, TRUMP/NAFTA

•    TPW TODAY – 3 Ts: TRADE, TECH & TURBANS

TPW HISTORY

TPW THESIS GREW OUT OF FRUSTRATION WITH POST GREAT FINANCIAL CRISIS (GFC) POLICY FIXATION ON MONETARY POLICY & CB DEPENDENCY

ONE OUTGROWTH OF THAT FIXATION MOST VISIBLE TODAY – RISE OF POPULISM & GROWING SENSE THAT STATE OWNED CAPITALISM (CHINA, TURKEY, MEXICO) OR SOCIALISM  IS PREFERABLE TO POST GFC CAPITALISM AS PRACTICED IN US/EU.

POST GFC WORLD NEEDED A GROWTH STRATEGY – TPW REGIONAL INTEGRATION/REGIONAL DEEPENING IN EACH OF THREE MAIN REGIONS: ASIA, EU AND THE AMERICAS CAN DRIVE THE GLOBAL ECONOMY FORWARD.

THIS PROCESS OF REGIONAL INTEGRATION IS DRIVEN BY THREE NEW & MUTUALLY REINFORCING FACTORS: EACH REGION’S GROWING ABILITY TO SELF FINANCE, (THINK CHINA CAPITAL MKTS), SELF PRODUCE, (THINK ADV MANUFACTURING, ROBOTICS, 3 D PRINTING, MASS CUSTOMIZATION) AND SELF CONSUME, (THINK URBANIZATION, RISE OF SERVICE SECTOR AND OF COURSE ECOMMERCE).

FIRST WROTE AND SPOKE ABOUT TPW IN 2012/13 & HAVE SUBSEQUENTLY USED THIS THINKING IN MY OWN INVESTING, WHAT HAS BECOME THE TRACK RECORD FOR TPWIM AS WELL AS IN MY INVESTMENT ADVISORY BUSINESS.

OVER THE PAST FEW YEARS IT HAS BECOME INCREASINGLY CLEAR TO ME THAT THE TPW FRAMEWORK PROVIDES A DIFFERENTIATED VIEW OF THE INVESTMENT LANDSCAPE, ONE THAT SHOULD ALLOW TPWIM TO ADD ALPHA OVER TIME.

TWO EXAMPLES STAND OUT:

BREXIT – OH WOE IS EU – NO, ACTUALLY GOOD FOR EU BC BREXIT FORCED THE EU TO START TO THINK ABOUT A WORLD W/O UK… THEN TRUMP ELECTION AND THE EU NEEDED TO START TO THINK ABOUT WORLD W/O US SIDE BY SIDE.

TRUMP – NAFTA – OH WOE IS MEXICO – PESO FALLS FROM 18 TO 22 – GREAT OPPORTUNITY TO GET LONG…ESPECIALLY IF YOU HAD A TPW/REGIONAL DEEPENING MINDSET – ONE WOULD KNOW THERE IS NO WAY THE VALUE ADDED SUPPLY CHAINS ACROSS THE US & MEXICO WOULD BE RIPPED APART AND LO AND BEHOLD WHAT DO WE HAVE TODAY – NAFTA IN A DIFFERENT NAME.

MORE RECENTLY WE HAVE HAD STATEMENTS LIKE THE FOLLOWING: “ITS NOT THAT EASY TO EXIT THE EU. ITS NOT COSTLESS, ITS NOT WITHOUT CONSEQUENCES”. FRENCH PRES MACRON LAST MONTH. FROM THE EU POV, BREXIT IS AN ADVERT FOR ANYONE ELSE THINKING ABOUT LEAVING.

OR THIS ONE: “WE (THE US) REJECT THE IDEOLOGY OF GLOBALISM” PRES TRUMP DURING HIS UN SPEECH LAST MONTH.

GLOBALIZATION AS WE KNEW IT IS DEAD; ECONOMIC NATIONALISM IS UNLIKELY TO SUCCEED AND SO THE TPW FITS BETWEEN THE TWO LEVERAGING THE THREE NEW FACTORS NOTED ABOVE.

TODAY THE GLOBAL EVOLUTION TO A TRI POLAR WORLD IS ACCELERATING, DRIVEN BY A COMBINATION OF TRADE TENSIONS, TECH SPATS & TURBANS (FANCY WAY OF SAYING SANCTIONS).

LETS TAKE EACH IN TURN.

TRADE TENSIONS

ITS PRETTY CLEAR THAT PRES TRUMP WANTS TO FUNDAMENTALLY CHANGE THE GLOBAL TRADING SYSTEM TO BRING GLOBAL SUPPLY CHAINS CLOSER TO THE US.

FOR ALL THE BLUSTER THE NEW NAFTA, NOW CALLED THE USMCA, IS BASICALLY THE SAME AGREEMENT WITH A FEW CHANGES, MOST IMPORTANTLY THE CONCEPT THAT EACH PARTY HAS TO NOTIFY THE OTHERS IF THEY PLAN TO ENTER TRADE TALKS WITH A NON-MARKET ECONOMY – NO PRIZE FOR GUESSING WHO IS A NON-MARKET ECONOMY – RIGHT – CHINA.

CHINA IS REALLY THE TARGET HERE AND THE US IS MAKING IT VERY CLEAR TO CHINA THAT IT NEEDS TO DEVELOP ITS OWN REGIONAL SUPPLY CHAINS, ITS OWN TECH ECOSYSTEM AND NOT DEPEND ON THE US.

ASIAN INTEGRATION IS LIKELY TO BE A BIG WINNER FROM THIS TRADE WAR AS CAPITAL AND PRODUCTION DISPERSE FROM CHINA TO INDIA AND SE ASIA (YTD FDI FLOWS TO CHINA AND INDIA ARE THE SAME – EVEN THOUGH CHINA GDP IS 5X THAT OF INDIA).

SINCE THE US HAS WALKED AWAY FROM TRANS PACIFIC PARTNERSHIP (TPP)  IT IS  ESSENTIALLY CEDING ASIA TO CHINA – SPEEDING UP ASIAN INTEGRATION AND REINFORCING CHINA’S LEADERSHIP POSITION IN ASIA. ON ANY LT POV THIS IS A GRAVE MISTAKE GIVEN THAT THE OECD SUGGESTS THE MAJORITY OF GLOBAL GROWTH WILL COME FROM ASIA AND PARTICULARLY CHINA, INDIA AND ASEAN OVER THE COMING 30 YRS.

THE CHINESE LEADERSHIP TALKS ABOUT THE NEED FOR SELF RELIANCE WHILE THEY FOCUS ON THE 3 RS: RETALIATE, REFLATE AND REFORM. FOCUS ON DOMESTIC DEMAND DEVELOPMENT – NOW ROUGHLY 55% - NEED TO GET TO 70%.

THE EU IS ALSO AFFECTED BY TRADE GIVEN ITS QUITE LARGE CA SURPLUS AND POSITION AS A SWING PLAYER BETWEEN THE US AND CHINA. THE EU HAS TWO ROLES TO PLAY: THE FIRST IS TO DEVELOP MORE INTERNAL CONSUMPTION AND THE SECOND IS TO BE THE REFEREE – GIVEN THE FOCUS ON THE WTO ETC THE EU IS IN POSITION TO PLAY ONE OFF THE OTHER (AS THE PAPERS SUGGEST IS HAPPENING IN THE RUN UP TO THE G 20 CONF IN BALI).

ON THE INTERNAL DEVELOPMENT FRONT, MS RECENTLY DID A DEEP DIVE INTO EU FISCAL INTEGRATION AND THE UPSIDE IT REPRESENTS FOR EUROPEAN FINANCIAL ASSET PRICES – IT IS WELL WORTH THE LOOK.

TECH

TECH IS A FASCINATING NEW DRIVER TO THE TPW AS IT SHIFTS FROM A GLOBALIZING FACTOR TO A REGIONAL ONE WITH DEEP TECH THINKERS LIKE ERIC SCHMIDT, EXEC CHAIR OF GOOGLE SAYING RECENTLY THAT IN 10 YRS HE EXPECTS TO SEE TWO INTERNETS: ONE LED BY THE US AND ONE LED BY CHINA. HAS ANYONE HERE HEARD OF SPLINTERNET?

INTERESTINGLY ENOUGH ONE OF THE FIRST INKLINGS ON THIS FRONT CAME IN CONVERSATION WITH SCOTT AFTER ONE OF HIS GREAT RESEARCH TRIPS TO SILICON VALLEY A FEW YRS BACK.

DATA PRIVACY, NATIONAL SECURITY, ELECTION HACKING, THE COMING AI FIGHT ETC ETC ALL SUGGEST TECH WILL NO LONGER BRING US TOGETHER BUT RATHER WILL SERVE TO KEEP US APART.

I AM THINKING ABOUT ADDING TECH AS A 4TH DRIVER TO THE TPW – MAYBE SOMETHING LIKE SELF TAUGHT – PLAYING OFF THE COMING AI RACE WHICH IS VERY DATA DEPENDENT AND IN WHICH CHINA HAS BOTH MORE DATA AND A MORE FORMAL PLAN TO LEAD AI DEVELOPMENT.

THE HEADLINES ABOUT CHINESE SPYING AND PLACING DEVICES ON HARDWARE STRONGLY SUGGEST THAT TECH CENTRIC GLOBAL SUPPLY CHAINS WILL BE UNDER PRESSURE TO COME HOME WHILE DEMAND WILL BECOME HOME PLAYER CENTRIC – THIS HAS BIG IMPLICATIONS FOR TECH STOCKS WHICH ARE PRICED AS GLOBAL OPPORTUNITIES AS WELL AS BROADER BUSINESS IMPLICATIONS.

LET’S TALK TURBANS

WHAT IS FASCINATING FROM THE TPW PERSPECTIVE IS THAT THE US OBSESSION WITH IRAN IS LEADING TO A SITUATION WHERE THE EU, CHINA, RUSSIA AND IRAN ARE MEETING TO DISCUSS WAYS TO DEVELOP ALTERNATIVE PAYMENT SYSTEMS TO CIRCUMVENT US SANCTIONS AND KEEP IRAN ONSIDE ON THE NUCLEAR DEAL.

THIS IS PRETTY AMAZING STUFF – OUR ERSTWHILE ALLIES AND ENEMIES COMING TOGETHER TO ACTIVELY OPPOSE US POLICY AND DEVELOP WAYS AROUND USING THE USD, US BANKS ETC.

NOW GIVEN THAT THE US IS ONE OF THE WORLD’S LARGEST DEBTORS, FACING AN EXPLOSIVE BUDGET DEFICIT SITUATION AND IN CLEAR NEED OF CONTINUED FOREIGN BUYERS FOR OUR US TREASURY DEBT IT DOESN’T SEEM TO MAKE STRATEGIC SENSE TO MOVE IN THIS DIRECTION.

CHINA IS MOVING AHEAD WITH YUAN DENOMINATED OIL CONTRACTS, RUSSIA IS DESPERATE TO FIND WAYS AROUND US FINANCIAL SANCTIONS AND THE US MERELY GOES ALONG, SANCTIONING HERE, PUNISHING THERE WITHOUT SEEMING TO THINK ABOUT THE LT IMPLICATIONS OF ITS ACTIONS, NAMELY TO REINFORCE TPW DRIVER #1 EACH REGION’S GROWING ABILITY TO SELF FINANCE.

THE DISPUTE BETWEEN THE US AND EU IN REGARD TO IRAN IS A MAJOR DRIVER OF THE EU DEBATE OVER THE NEED FOR “STRATEGIC AUTONOMY” WHICH REPRESENTS A MORE SERIOUS CLEAVAGE BETWEEN THE US AND EU THAN EVEN THE IRAQ INVASION, ACCORDING TO EU FOREIGN POLICY SOURCES.

ONE LAST POINT BEFORE WE CUT TO A SHORT TPWIM COMMERCIAL:

TPW IS ALSO A USEFUL LENS TO THINK ABOUT ONE OF THE GREAT CHALLENGES OF OUR TIME – THE MIGRATION OF PEOPLE ACROSS BORDERS BOTH IN EUROPE AND HERE IN THE AMERICAS.

IN EUROPE WE SEE INCREASED EFFORTS TO WORK WITH N AFRICAN COUNTRIES TO DEVELOP WORK TO KEEP FOLKS IN AFRICA… IN A RECENT DISCUSSION BETWEEN INCOMING MEXICAN PRES AMLO AND PRES TRUMP MIGRATION FROM C AMERICA THROUGH MEXICO TO THE US WAS DISCUSSED AS WAS A PROGRAM TO INVEST IN C AMERICA TO KEEP FOLKS WORKING THERE.

CUT TO COMMERCIAL

SO EARLIER THIS YEAR, MY PARTNER JAMIE GARDINER AND I FORMED TPW INVESTMENT MANAGEMENT (TPWIM), A NEW INVESTMENT MANAGEMENT FIRM THAT OFFERS GLOBAL, MULTI ASSET, LIQUID AND LOW-COST ETF BASED PORTFOLIO SOLUTIONS FOR BOTH HNW/FO INDIVIDUAL AND INSTITUTIONAL INVESTORS.

WE OFFER A GLOBAL PRODUCT SUITE THAT INCLUDES OUR FLAGSHIP GLOBAL MACRO MULTI ASSET (GMMA) PORTFOLIO WITH ITS 8 YR TRACK RECORD AS WELL AS GLOBAL MACRO INCOME (GMI) AND GLOBAL MACRO EQUITY (GME) PORTFOLIO SOLUTIONS.

WE USE THE TERM “GLOBAL MACRO” IN ALL OUR PRODUCT NAMES BECAUSE WE BELIEVE THAT GLOBAL MACRO REPRESENTS A  WAY OF THINKING ABOUT INVESTING BASED ON NATIONAL AND INTERNATIONAL POLICIES & EVENTS RATHER THAN THE NAME OF A SPECIFIC INVESTMENT VEHICLE, NAMELY THE GLOBAL MACRO HEDGE FUND SPACE – WHICH BTW WE FEEL IS RIPE FOR DISRUPTION… HAPPY TO TALK ABOUT THAT IN Q&A AS WELL….

THANK YOU FOR YOUR ATTENTION & I WOULD BE HAPPY TO TAKE ANY QUESTIONS.

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