Strategy Note /

Back to the 1990s

  • When a piece of research claims something is "just about perfect" I pay attention. In this case its a US cap ex boom.

  • A cap ex boom could drive higher productivity to offset rising wages and support above trend growth, a la the 1990s.

  • Strategically we anticipate such an environment; tactically we see things falling into place for a perf chase into YE.

Jay Pelosky
Jay Pelosky

TPW Founder & Global Strategist

TPW Advisory
17 September 2021
Published byTPW Advisory

1087 words – a 3 minute read.


Today’s Musings comes straight from my BTV Open show appearance this morning with strategists from Blackrock and Morgan Stanley – good company for TPW Advisory!


Every once in a while there is a research report that crosses the desk or the computer screen that makes you sit up and take notice.


I had one such occurrence this week with a report on the coming US cap ex boom by Ian Shepherdson’s team at Pantheon Economics, a long standing and well respected group (had a great Covid tracker in 2020). What really caught my eye was the comment that conditions for such a boom were “just about perfect”. Now when I hear that I pay attn.


Pantheon argues that the capital stock of the US needs rebuilding after a dearth of such spending during the 2010-2020 period, that companies are cash rich, borrowing costs are low and labor tight - in other words perfect conditions.


Furthermore, such a US cap ex boom could lead to higher trend productivity growth that could cap inflation even with high wage gains a la the 1995-2000 period when productivity growth reached nearly 3% offsetting wage growth of roughly 5% pa so that Unit Labor Costs (ULC ), key to inflation, only rose 2%.


Importantly, the period was very positive for stocks with ACWI up 19% pa between Jan 1995 and Dec 1999.


Regular readers know I believe we are at the beginning of a Big Govt phase stimulated by Covid and accelerated by Climate. In fact our climate response will owe a lot to Covid in that it sparked this sense that some issues can only be handled by Govt – like a pandemic or existential crisis like Climate change.


In this regard the Biden “human capital” plan is critical, containing as it does the only hope (Clean Energy Standards) for the US to meet its 2030 Paris Accord peak carbon targets (Climate Speed). The good news is that it is winding its way through Congress with the House Ways & Means Comm moving it forward with $2T in pay fors in place. Big EV subsidies in the bill – I may take advantage of the Ebike subsidy myself!


This is big picture multi year strategic outlook stuff – my (fairly unique) POV is that the conditions are being put in place to boost DM economic growth to above trend led by pro cyclical spending policies like the Biden Infra plan (Europe has its Next Gen plan, Japan will boost fiscal spending with its new Govt), the cap ex boom noted by Pantheon and a tech led productivity surge accelerated by Covid.


Form a tactical point of view one notes the following:


Asian Covid case counts are rolling over, Japan vaccination % is now better than the US (US vaccination % now in last place among G7 nations), China airlines departures up +50% from recent low > all suggest the Asian re opening is underway & a synchronized global expansion lies ahead.


JPM reports 90% of US states have Covid Reproduction rate under 1%… Dominance of Delta wave ((99% of US cases) means there is no other wave behind it – as we approach 70% vaccinated we are beginning the shift from pandemic to endemic where Covid becomes more like the flu.


After several months of weak US Econ data (Citi ESI at lows) Philly Fed and August retail sales suggest better days ahead. Philly Fed also suggests supply chain woes (and hence inflation concerns) may be overstated as unfilled orders, delivery times and prices paid all rolled over while inventories rose.


Taper fears ebb as inflation looks to have peaked while the UST is likely to reduce borrowing by roughly $1T in 2022, offsetting Fed withdrawal of QE. Higher rates are bullish for stocks, esp. Cyclical US sectors and non US equity.


After Europe’s best 6 M run vs ACWI in 20 yrs., Japan takes the equity baton as DM x US enjoy a twin engine ride. Japan trading at widest discount to EU in 7 yrs. Understanding and embracing the US twin engine construct (Growth/Value) this past year has been very helpful – now its happening in EAFE.


AAII bullish sentiment just had 2nd biggest plunge in 34 years - usually seen at end of major corrections - while BofA’s FMS notes managers have the lowest Growth/Earnings expectations since Spring 2020 – these sentiment reads suggest the Q3 growth slowdown in the price while the Q4 pick up and 2022 global expansion are not.


So to recap:


Delta is fading, economic data is picking up, sentiment is lousy, expectations low, taper fears have ebbed.


Add to this litany the 6 Tier One US banks calling for an equity correction (V rare - esp. with SPY within 2% of ATH) & TPW Advisory will take the other side.  We continue to expect a performance chase into YE led by the UPing hedge fund community & as such, we remain OW Cyclical/Value/SC in US & note that over the last 3M US Value is flat vs SPY +5%. 


We like Japan and Asian EM (EM trades at a multi year wide discount to ROW). China equity is actually up over the past month – given all the headlines and chatter that is not what one would expect unless one held the view as we do that “Common Prosperity” risk was in the price (China trades at 20 yr. wide discount to India).


The more surprising thing is that the slow motion Evergrande implosion also seems to be in the price  as investors expect a controlled meltdown akin to prior examples like Anbang. We note that the Chinese Yuan is trading close to 5 yr. highs vs its trading basket – no worries here. Could the silver lining of a property slowdown be capital flows into the Chinese equity market?


In Europe, MS notes equity positioning in Europe is as light as it has been in last 5 years as hedge funds sold the rally - we remain long EU equity. We continue to like Commodities as well, especially energy (EU energy pricing, Uranium move) & industrial metals which have sold off aggressively this week.


Our neighbors to the North have an election coming on Monday – no big changes expected – German elections next together with the LDP leadership contest in Japan – could be some big policy changes ahead to fuel our thematic exposure… we will be paying close attention.


TGIF – this week just flew by.