Forward looking markets, the calendar & Covid Speed all say focus forward so that’s what we will do. I am psyched to write this month – mostly because of the exciting market landscape ahead of us, states Jay Palosky of TPW Advisory.
What Stays: above trend global growth & inflation together with stellar earnings power & in your face climate change.
What Goes: 24/7 Delta as vaccine mandates, boosters and infections reduce the Covid impact. QE also begins to depart the stage as the Fed tapers, followed by the ECB while the PBOC stands ready to provide more global liquidity.
What Comes: Big Government as climate requires resources far beyond the company or consumer level. Higher rates are also coming & will support higher stock prices, esp. in the Cyclical and non US space.
CLIMATE
There is absolutely no doubt in my mind – none – that Climate is the single biggest global macro issue of this decade.
I add Climate Speed – the telescoping of time between the short and long run – alongside my Covid Speed model. From a far off threat to this summer’s fire, flood and storm, in your face climate change reminds us that we have less than a decade to meet the Paris Accords & only months to pass the Biden Infrastructure Plan – the only hope for the US to meet its targets.
Proper pricing of common goods: clean air, water etc. will result in dramatic pricing changes in the years ahead – Climate is the largest segment in our TPW 20 thematic model portfolio – how about you?
ECONOMICS
Q3 lull is upon us as suggested by the US August jobs report. It is a lull and above trend global growth thru YE 2022 supported by inventory rebuild and a well off consumer lies ahead.
Inflation fears continue to be overdone – some inflation is a good thing.
POLITICS
Afghanistan represents the end of the US nation building project. From a Tri Polar World POV, the US exit is likely to deepen regional integration in both Asia and the Americas.
It is also likely to provide support for the Biden Infrastructure plan as Democrats will want Pres. Biden to reassert US global leadership at COP26 in November.
German & Japan elections are both likely to result in more stimulus to each economy with both countries needing to move forward faster on climate and digitalization. We are more worried about Evergrande than “Common prosperity” in China.
POLICY
Policy makers are being tasked to make policy at speed without a full understanding of either their instruments (CBAM) or the reaction of citizens (Vaccine mandates).
Investors need to understand and embrace that Governments will play a larger role in the years ahead – that Covid, Climate, Cybersecurity etc. are too big for individual companies or countries.
Successful Big Govt can help usher in a new age of above trend global growth, leveraging pro cyclical fiscal and monetary policy in combination with a cap ex boom driven by inventory rebuild, record low cost of capital, decades of underinvestment and climate mitigation. Surging productivity driven by rapid technological adoption is the finishing touch.
MARKETS
Thematic investing in an Age of Big Govt is very apropos, especially for macro practioners such as TPW Advisory.
Above trend growth coupled with surging earnings suggests the time is right to shift from liquidity driven markets to earnings driven ones.
Headlines about daily new S&P highs are misleading; it’s absolutely critical to understand that the bulk of the US equity market and many non US markets have been undergoing a stealth correction. This is most true in the Cyclical & Value space as well as down the cap structure; the average US small cap stock is roughly 24% off its recent high. The energy sector is off 15-20%. EM has been crushed. AMLP – KRBN is the current version of the old energy – new energy combo… opportunity on both sides.
Delta is fully discounted, the Taper is ahead – we remain deeply UW Fixed Income & expect higher US rates to support the next up leg for Cyclical, Value and non US equity. Laggards will become leaders; we expect Japanese equity to really make its move and remain OW Latin America in EM.
Commodities have also been taken to the cleaners in the past few months – we remain significantly overweight from energy to metals both industrial and precious. Our thematic exposure continues to pay off with Uranium breaking out to a 6 yr. high together with good performance in Cyber and Crypto. The USD has failed to break out – we expect weakness ahead as the ROW normalizes, weakness that will further support both non US equity & Commodities.
