Our first TPW update in almost two years focuses on The Age of Speed—Covid speed, climate speed, and analytical speed and how it is likely to accelerate the process of regional integration in the tri-polar world of Europe, Asia, and the Americas, states Jay Pelosky of TPW Advisory.
In an Age of Speed, we expect government decision-making to become a critical differentiator. The private sector’s new global production footprint of 30/40/30 regional split will further drive regional integration. Labor and migration policies will become increasingly important.
Each region’s growing ability to self-finance, a core TPW building block, will catalyze regional integration. A more competitive landscape among the three regions coupled with a world massively overweight US financial assets provides the AA takeaway—time to spread one’s geographic bets.
NAFTA began the TPW back in the early 1990s but has stagnated since. The lack of political will to move forward on a hemispheric free-trade area is a big mistake. Political gridlock is a luxury the US and the Americas can no longer afford in a world of decision-making at speed fueled by AI and machine learning. The Americas’ competitive position is at risk in an increasingly competitive TPW.
The political landscape south of the US border is not very conducive either. This is most visible in the migration battles taking place at the southern US border. 650M people live in South and Central America with a per-capita income approaching $10k. There is a big opportunity for the Americas to size up and leverage the new regional production footprint of 30/40/30.
The incipient launch of Asia’s Regional Comprehensive Economic Partnership (RCEP), the world’s largest trading agreement is the latest illustration of Asian integration. China’s Belt & Road program continues to stitch the region together while its growing focus on domestic demand—“dual circulation and common prosperity”—should drive deeper economic integration.
The rise of Asian financing capacity is having a growing impact—from India’s VC scene to Didi’s NY delisting— in an age of capital abundance the region that best allocates capital will gain a competitive advantage.
ASEAN’s growing economic clout as both a production and consumption growth center will further deepen Asian integration and reinforce the 30/40/30 production footprint.
Europe’s testing times: Italy’s populist movement, Brexit, President Trump, have served to deepen EU integration and focus on the need for “strategic autonomy.”
Europe can leverage its existing leadership role in tech regulation and expand into climate legislation, as well as serve as an intermediator between the growing Chinese-American rift. Its recently announced Globe Gateways program follows on its Next Gen regional program to help level up the region and deepen its integration.
Migration issues and potential conflict between Russia and Ukraine are flash points that should lead to more coordination and expression of regional inclusion. Getting the labor issue right is going to be increasingly important—UK provides a clear example of how not to do it.
Whichever region figures out the labor and migration issues will be ahead of the curve. More, not less, people are going to be needed in the Age of Speed.
The Age of Speed sets up a much more competitive landscape between governing systems—China’s centralized model vs. the more diffused US and European models.
Conflict is less likely to be war fighting and more likely to be regional in nature and political—economic in scope. The Age of Speed is likely to drive faster and deeper regional competition as a winner-take-all mentality extends thru tech to finance and on to production, distribution, and consumption.
Each region’s ability to self-finance, self-produce, and self-consume—the TPW template for over a decade—is truly manifesting for the first time. The private sector’s role in implementing the 30/40/30 regional production footprint serves to reinforce this while the Age of Speed will accelerate it.
Capital will play a bigger role—boosting competition, spurring innovation, and developing a more dynamic form of regional capitalism. Which region becomes the best capital allocator will be ahead of the curve. The tortoise is highly unlikely to beat the hare in the Age of Speed.
We appear to be moving from a world of decentralized production and centralized wealth to a more centralized regional production footprint and decentralized wealth—a more fertile construct for the TPW.
One version of the TPW timeline suggests the 1990s were Americas Decade and the 2000s were Asia’s coming-out party led by China. One wonders if the 2020s could be Europe’s Decade—the time to finally put to bed all those digs about it being “an open air museum.”
Each region’s growing ability to compete with the other sits askew from global investors long-standing and heretofore correct massive overweighting of US assets. The Age of Speed’s likely impact on the TPW’s development would seem to argue for a more diversified global equity allocation.
Omicron + the Fed about face on inflation have served to upend financial assets over the past week, creating another “pothole” pullback with its now standard oversold conditions, sentiment flip flops (now bullish as AAII bears at largest # in a year), and technical navel gazing.
Insight is limited for a week or two on both fronts—in the interim, we recall Covid speed and science’s ability to produce and roll out an Omicron vaccine (should it be necessary) in roughly 3-4 months. The lesson of the past two years is that economies adjust, and each lockdown has less impact than the one prior (see Europe’s Q3 EPS growth of 60%).
Worse case scenarios exist (more virulent and deadly Omicron) as do more bullish ones (more transmissible but milder Omicron). Time will tell. Investor are shooting first and asking questions later. It doesn’t mean one has to join in.
We remain constructive and expect above average growth and above trend inflation next year supported by inventory rebuilds & strong consumption on the back of record household net worth. We see a growing case for a more sustained cap-ex boom and productivity surge akin to the 2nd half of the 1990s. Solid EPS growth, sustained negative real yields are likely to underpin risk assets.
Current market action seems somewhat perverse to us—investors are fleeing those oversold market sectors that have the most upside to 2022’s economic outlook noted above (roughly consensus) while crowding into the most expensive parts of the market with the most downside to said scenario. Could Omicron top tick the big-cap tech crowding phenomenon?