Ep. 377: Jay Pelosky on the Tripolar World, the Spending Super Cycle, and the Global Earnings Boom

Bilal Hafeez (0:03)

Welcome to the Macro Hive Conversations Podcast. I'm Bilal Hafeez, Head of Strategy at Macro Hive. Before we dive in, a quick update. Following Macro Hive's acquisition by the BGC Group, BGC has launched a new regulated business called Macro Hive Markets. For the first time, onboarded clients can also access execution services via Macro Hive Markets. This new workflow will allow macro institutional investors to benefit from strategy and quant insights, alongside access to global liquidity. Please contact Andrew Simon or Gail Motibrian on Bloomberg or click the link in the description below for more details on Macro Hive Markets and its service offering.

Onto my guest for this episode, we have Jay Pelosky. He's the founder of TPW Advisory and he's formerly the top ranked head of asset allocation at Morgan Stanley. We have a wide-ranging discussion, so I'm sure you'll enjoy it. Onto our conversation. Greetings and welcome, Jay. It's always great to have you on the podcast show.

Jay Pelosky (0:59)

Thanks, Bilal. Nice to be back.

Bilal Hafeez (1:00)

I have to say, I love reading your weekly pieces because I'm in the macro world and so many macro people tend to be in the doom and gloom camp when it comes to equity markets. And perhaps it's useful just to remind our audience, your bigger picture, structural view first, what's underpinning your view on equities. You talk about the tripolar world. So if you just remind us what you mean by that and also the spending super cycle that has been driving things.

Jay Pelosky (1:30)

Yeah. I've been doing global macro since the mid-90s, I would say, when I launched Morgan Stanley's Global Emerging Market Strategy product. So my experience base is pretty long.

And over the last 15 years or so, I've focused on what I call the tripolar world, which is a thesis arguing that regional deepening or regional integration in the three main regions of Asia, Europe and the Americas was going to be the way forward, right? I mean, after the great financial crisis, globalization was dead, the finance world was the tip of the spear, and that was severely damaged. And nationalism really doesn't work. And we saw that with Brexit a few years later. And so regional deepening or regional integration was my view as to how we would move forward. And basically, in my reading, much of what has occurred since that period of time over the last 10, 12 years has validated that thesis. If you think about COVID, if you think about Russia, Ukraine, if you think about US, China, I think there's a lot to support the idea that no country has everything it needs, that countries are starting to form blocks, and places like Europe, places like Asia, and to a much lesser extent, particularly under the current administration, the Americas are integrating. And so the most recent kind of iteration, not iteration, but addition to this tripolar world, is what we call the tripolar world spending super cycle, which we introduced in April, where we argued that every region, all three regions, are spending aggressively, both public and private, on three existential issues, which are AI, defense, and climate.

And so our thesis was simply that this spending is unprecedented, it's going to be ongoing, it supports what we call our global growth long cycle, which we've been writing about since 2022-23, coming out of COVID, with all the monetary support, we were pretty pro-growth that whole period. And now arguing that the super cycle, the spending super cycle, carries that global growth long cycle through the end of this decade. So we're pushing out through 2030 and beyond, and arguing that this global growth long cycle is globalizing an earnings boom, which is likewise unprecedented. And therefore, we argue that this supports a secular leadership change in global equities away from the US., which was the leader from the bottom in 2009 through 2024, to the rest of the world, which offers relatively the same, if not better, earnings growth in the US at a much cheaper multiple. EM trading at 50% discount to the US as an example, and offering basically unowned positions. Everyone is severely underweight ex-U.S. All the money in the world over the last five years has flowed into the United States. And so we are arguing that the US is going to be under a hair cutting regime, right? Premium equity valuation comes down, cost of financing goes up, as we've seen with the treasury market, dollar weakens, and the rest of the world outperforms. And as you know, these trends do not last for quarters or months. These are yearly, multi-year moves. And so we would expect that the outperformance of EM, for example, EM equity, already 18 months long, should extend for the next several years, two to five years. And so there's a real big opportunity. And we think to just put the final touch on it, our musings that we published in our sub stack on Friday, the title was Face Ripper Rally Ahead. And so we're arguing that we're probably right about coming right into a period where stocks we think are going to do quite well.