With a nod to Ray Kurzweil’s famous book: The Singularity Is Near about the fusing of man & machine, I would like to note the coming synchronicity of regional reopenings to finally encompass the globe, states Jay Palosky of TPW Advisory.
I have written about a synchronized global expansion for some time, but Delta really derailed the timing – when Asia was open earlier this year, (recall 1st in, 1st out Covid timeline) Europe was shut. As the US and EU opened over the past few months, Asia’s lockdown has been as stringent as Spring 2020 as GS’s lockdown index has pointed out and recent PMIs in the mid-40s for much of the region have confirmed. Hat tip here to my buddy, Jordi Visser at G Weiss & Co.
Now Asia is starting to reopen as China successfully eradicated its latest tiny breakout, Japan has caught up in the vaccination race (too late for PM Suga) and ASEAN countries begin their reopening. We are V bullish (and OW) Japan equity and see the vaccinations + reopenings + company earnings power/activism + elections as V supportive of higher prices.
This has huge implications across both economic and financial market outlooks. It suggests for example that supply chain snafus could start to unwind, that inflation fears might prove to be overdone, and that strong global growth will continue through 2022 and beyond.
It also supports a Fed taper as we enter 2022, a shift from liquidity to earnings-driven stock markets, higher DM rates (EM rates are already rising) and solid support for higher commodity prices.
For us at TPW Advisory, it also means reducing both our DM equity OW and our EM equity UW in our Global Multi Asset (GMA) model portfolio. Both have worked well with EFA +12% YTD and EEM +2%. We have added to Asian and European EM equity exposure while trimming our LA equity position as political woes in Brazil threaten to overwhelm cheap valuations and good commodity exposure. China’s “Common Prosperity” is in da price, Asian re opening is not = opportunity.
Our good buddy Chase Taylor at Pinecone Macro was out recently with a chilling case for much colder weather ahead – I checked my trusty Farmer’s Almanac and it agrees. As such our EU EM exposure is in Russia as a back door play to potential EU energy and power shortages this winter as Nord Stream 2 comes online & RSX breaks out (take a look at recent natural gas pricing).
There are many other issues to focus on as well. I introduced Climate Speed in our recent Monthly arguing that the in your face nature of climate change in 2021 is resulting in the “telescoping” of time and the blurring of the difference between the short and long run.
The need to meet the 2030 Paris Accord targets for peak carbon provides a good illustration. Seems like a long way away, right – but for the US, the Biden “human capital” plan with its Clean Electricity Program represents the only chance the US has to meet its targets.
That decision will be taken in the next 2-3 months – that is telescoping time. I believe it will pass as the Afghan exit means Dems need to pass it to propel President Biden to COP26 as a global leader in the climate fight.
Uranium represents another, market based, example of climate telescoping time. Here, the uranium price has just exploded over the past few weeks as a new physical buyer (Sprott) has upended the uranium spot market. A market that has been in structural deficit since Fukushima has just had a structural reset. We hold exposure in both our Global Multi Asset & our TPW 20 global thematic model portfolios.
Climate is the single biggest global macro trend of this decade – full stop. Accordingly, it’s the biggest single segment in our TPW 20 model portfolio while keeping a size 14 foot in crypto.
Speaking of President Biden, his vaccine mandate focused speech last night should mark the end of Delta as a major public health threat – markets should welcome it. Delta was discounted back in mid-July but vaccinations, mandates, testing, booster shots etc. mean forward looking markets can start to truly put it in the rear view mirror.
Its also worth noting that because Delta was so contagious and spread so rapidly it has pretty much cleared the field of any other variants that could threaten a Delta 2. Increased vaccinations will further reduce the potential for new, more dangerous, variants to emerge.
It really is an example of government stepping in and creating a new dynamic – sadly, this is a politically fraught topic here in the US, but I believe investors need to get used to and embrace big government because Covid, climate, cyber security, etc. are NOT issues that any one company or even country can handle.
Adam Tooze, the Columbia University historian who has been making headlines with his new book: Shutdown (and who is worth a follow) has a great JM Keynes quote he has bandied about of late: “Anything we can actually do we can afford”.
We can both meet and afford our climate targets. Such an effort, led by big government, also represents the best chance we have to boost DM’s onto a new and higher growth path fueled by procyclical policies, climate inspired public-private cap ex booms and surging, tech led productivity.
This, by the way, also provides the best chance for CBs to get off the zero bound without crashing global equity markets and should be embraced not feared. It’s also virtually nowhere in any market outlook. I think it has a growing probability of occurring.
The cap ex boom is and will be spurred by climate as well as growing regionalization of production. I was struck by two stories this week – one focusing on Toyota and its plans to build EV battery production plants around the globe – the other focused on Intel and its plans to do the same for semi fab plants. Here’s what Toyota’s chief production officer said, “We want to localize production as a general principle.” It truly is becoming a tri-polar world.
As we move towards the synchronicity, its worth noting that large parts of the US equity market and much of the world’s stock markets have been in a “stealth correction” for the past several months – especially cyclicals, value, small caps and non-US markets.
At the same time, MS reports that the US hedge fund community is woefully UPing (up 8% on average vs 20%+ for S&P), are as crowded into the LC growth names as they have been in a year and as a result are as short Value as they have been over the same period while also as UW Small Caps as they have been in the past 5 years. Our GMA model takes the other side across the board.
So, while the headlines shout slowdown and equity correction and strategists get defensive here’s the other side: a synchronicity-inspired, hedge fund led performance chase into YE fueled by cyclicals, value, SC, commodities and non-US markets like Japan, Asian EM, etc.