EXECUTIVE SUMMARY - 850 words – 2 minute read.
We are in the Great In Between, transitioning across Covid, Climate, the Shortage Economy and more. Transitions are tricky and some last longer than others; Covid and Climate will be with us for some time to come; supply chain and energy shortage fears should fade in the coming months.
2022 may surprise as a year of clarity after two years of Covid fog; a synchronized global expansion should allow investors to focus on the three main market transitions: from liquidity driven to earnings driven markets; from Growth to Value leadership and from UST bull to bear market.
Continue to expect a performance chase into YE as headwinds turn to tailwinds and stocks break out of their six month trading range. Rates, Oil, A$/Y cross and Dr. Copper confirm the break out. Remain OW Equity & Commodities, UW Bonds. Stay focused on: Cyclical/Value/SCs, Thematics, Japan/Europe equity, China debt/equity and gold miners.
We add Analytical Speed to the TPWA speed lexicon, joining Covid Speed (global intellectual & financial capital focused on a single issue) and Climate Speed (shrinking the time between short and long run). Analytical Speed refers to the combinatorial effects of massively faster computation as outlined by McKinsey which expects more progress this decade than in the past 100 years.
Its all about shrinking the time line between idea, analysis and execution/implementation - what I call decision making at speed.
COP26 expectations are suitably low; watch for details on a Global Carbon Market – properly pricing carbon across as much of the global economy as possible is mission critical.
Power generation side needs European clarity on whether nuclear power is a sustainable fuel as renewables become cheaper than fossil fuels. Tesla has made a lot of noise on the transportation side – it is shaping up as flagship Tri Polar World company.
October PMIs suggest Q3 soft patch is in the rear view mirror as Asia reopens with Japan and Australia Composites regaining the 50 level for the first time since Spring.
Supply chain concerns seem more US centric upon analysis driven by fiscal stimulus and cashed up consumers. Energy price spikes already rolling over as the gamification of sleepy spot markets ebbs.
Easing bottlenecks set stage for a synchronized global expansion with above trend growth and above average inflation supported by massive inventory restocking, cashed up consumers, a cap ex boom and attendant productivity surge. 3% inflation in return for 3-4% real GDP growth seems like a great trade – way better than deflation or 5-6% inflation.
Is the art of the possible and the big tent US Democrats have tested the limits of possible and come up with a $1.75T “framework” for the Biden Build Back better program.
Now attention shifts to Japan’s elections, Germany’s new Govt or the hot mess that is Brazilian politics. Germany is the focus – how it handles its debt brake while still upgrading its infrastructure and climate challenges will set the stage for broad EU action. China’s focus deepens on Fall 2022 Peoples Party Congress.
Covid, Climate, energy woes all serve to reinforce a key fact: we are in a new era of Big Govt.
Covid policy seems pretty straightforward at this point – Climate too – it’s a question of will not capacity.
Supply chain woes and energy spikes are more short term issues that are already in process of working themselves out as evidenced by shipping costs down 20%, semi chip delivery times stabilizing & energy prices down 30-40% from recent highs (EU Nat gas, China coal).
Global Monetary Policy in tightening mode but Big 4 (Fed, ECB, BOJ and PBOC) will move slowly. Markets off point on US and EU tightening timetable. Fiscal Policy a mixed bag, pulling back in US, expanding in Europe and perhaps Japan as well – China policy quiver full & at the ready.
Macro econ fears should continue to provide a low bar for 2022 earnings beats. BofA forward EPS indicator suggests 20% global EPS growth next year vs 12% consensus. Investors have had every reason to sell: Delta, China edicts, Evergrande (remember Evergrande?) and more recently the energy and supply chain woes. Positioning, sentiment, seasonality, buybacks all supportive.
Commodities leading the way, in a secular bull market; JPM notes a wide gap between asset price action and equity prices in energy, mining and financials. Bonds are in the early stages of a bear market – expect the 10 yr. UST to break 2% in 1st H 2022 – key technical level.
Remain OW Equity and Commodities, deep UW in Fixed Income. Strong thematic bias across: Climate, Cyber and Crypto spaces. Continue to prefer Value over Growth, Small Caps over Large, ex US over US, DM over EM. China of growing interest, gold miners too. 2022 a decision year for USD?
Speaking of Analytical Speed, enjoy this morning’s 15 min, Nucleus195 video where I discuss the Monthly’s main takeaways in a little more detail. Faster flywheel, faster…..
TGIF & Happy Halloween!