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What is the Outlook for Commercial Real Estate?

Darius recently sat down with Nick Halaris to explore the current state of US commercial real estate.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. A Commercial Real Estate Disaster May Be On The Horizon

Over the past couple of years, there has been a confluence of factors that have negatively impacted the real estate sector:

As a result, US commercial property prices are back down to pre-covid levels. Although they have declined substantially since the COVID-19 blow-off top, they will likely decline even further.


 

2. Commercial Real Estate Distress Levels Are On The Rise… Albeit Slowly

Distress levels in US commercial real estate have been accelerating since mid-2020 but are not yet at levels seen in the Great Financial Crisis because:

3. Commercial Real Estate Investment Volume Is Drying Up

Investment volume is down significantly YoY across commercial real estate:

Sellers are hesitant to sell because they expect inflation will increase again, increasing the value of their properties back to 2022 levels.

Buyers are hesitant to buy because their existing exposure is declining in value and interest rates are pricing them out of further investment.

Transactions are sparse as a result. The waiting game continues….

That’s a wrap! 

If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
  2. RT this thread and follow @DariusDale42 and @42Macro.
  3. Have a great day!

Will Inflation Come Back HOT?

Darius recently sat down with Anthony Pompliano to discuss inflation, its direction, and its effect on asset markets.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Headline CPI Is Accelerating Again, Primarily Due to Energy

Last month, the 3-month annualized growth rate of headline inflation spiked from just under 2% to 3.9%.

A material increase in energy inflation drove the move. 

Until last month, the three-month annualized rate of energy inflation had been negative for approximately one year; the August CPI report indicated an energy inflation increase of 25.4% on a 3-month annualized basis.

We expect the increase in energy inflation to persist as Brent crude oil continues its upward momentum.
 

2. Core CPI Continues to Decelerate, Primarily Due to Shelter

While Headline CPI is increasing, Core CPI, a measure that excludes some of the most volatile components like food and energy prices and therefore provides a clearer view of the underlying trend in inflation, is decreasing.

Last Wednesday’s report showed that:

3. Producer Price Inflation Is Back on The Rise Again And May Also Represent The Vanguard of Sticky Inflation

PPI, which measures price changes from the producer’s perspective, accelerated to 4.2% on a 3-month annualized basis – the highest value since the first half of last year.

Leading underlying measures of inflation like Super Core PPI are beginning to show upside momentum and we are starting to see the first signs that inflation is potentially bottoming out.

The return of inflation is negative for asset markets – with it comes a stronger dollar and greater bond market volatility, both of which are headwinds for any increase in global liquidity.

 
That’s a wrap!


If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
  2. RT this thread and follow @42Macro and @42MacroWeather.
  3. Have a great day!

US-Global Growth Divergence

Last week, Composite PMIs came in below expectations across continental Europe and in China. Stagflation is the fear in Europe, while deflation is the fear in China. Neither public sector appears ready to supply the liquidity required to ignite animal spirits within their respective economies and financial markets. Regarding the Composite PMI data specifically, only four (Japan, Russia, Brazil, and US) of the 13 economies that have reported thus far posted MoM accelerations in August. Only Japan, China, India, Russia, Brazil, and the US reported figures greater than 50, indicating expansion. Europe was a noteworthy laggard with Spain, Italy, France, Germany, Eurozone, and UK all slowing sequentially to sub-50 readings, indicating contraction.

It is now fashionable to make the short-USA/long-RoW (rest of world) call, citing valuation differentials, but we disagree with that view. Valuation is not a catalyst for market developments, Rather, valuation merely acts as an accelerant when flows reverse. FWIW, we do not believe valuations matter all the time; in fact, most of the time valuation is irrelevant because the overwhelming majority of investors cannot take risk in accordance the time horizons (3, 5, 10 years) that valuation metrics are most instructive on. Retail investors generally operate on short to medium-term time horizons because of FEAR and FOMO; institutional investors generally operate on short to medium-term time horizons because of career risk.

“No Landing” = No Liquidity, Says The US Dollar

The US Dollar Index is poised for its ninth consecutive weekly advance — the longest winning streak since 2005 as the global currency market rerates economic resiliency in the US and derates the economic outlooks in Europe and China. The reason why FX and interest rate volatility are drags on global liquidity is because when net international investment surplus economies like Japan and the Eurozone see their currencies weaken, it makes it harder for their financial intermediaries to create the dollars required to capitalize investments around the world. FX and interest rate volatility complicate that process and slow down the creation of new dollar supply at the margins.

Growth of the world’s demand for dollars is more stable due to the refinancing requirements of the existing stock of cross-border financing that is denominated in USD — roughly 50% of the total, with ~65% of cross-border loans and ~80% of international debt securities issued by entities that have no organic access to dollars. Thus, fluctuations in the supply of new dollars have an outsized influence in driving FX trends because of the relatively inelastic demand for dollars versus a more elastic dollar supply curve. More FX and interest rate volatility = marginal dollar supply falls faster than marginal dollar demand = stronger dollar. Less FX and interest rate volatility = marginal dollar supply rises faster than marginal dollar demand = weaker USD. This process is reflexive and feeds on itself until exogenous factors like central bank pivots inflect the trend. This is why price momentum in the currency market tends to trend.

Buy The Dip Until “Immaculate Disinflation” Transitions To “Sticky Inflation”

A return of inflation pressure destroys the “transitory GOLDILOCKS” narrative and potentially derails the actual GOLDILOCKS US economy that has supported risk assets for the past few quarters, paving the way for a cross-asset crash. Our qualitative research views expect that process to occur within 3-6 months. Our best guess based on the momentum in key inflation time series and the labor market is sometime around yearend or early in the new year.

Emphasis on “guess”. We deliberately never speak in certainties about the future; the only investors that do are those chasing clout on podcasts and social media platforms. Beware conviction from folks that lack the DEEP, DAILY Bayesian inference process required to understand the full distribution of probable economic and financial market outcomes.

If we are wrong on the timing of the handoff from “immaculate disinflation” to “sticky inflation” and it happens much sooner than our 3-6 months [from now] projection, our Global Macro Risk Matrix will transition from risk-on REFLATION to risk-off INFLATION early in that process. Such a shift would be your queue to shift from a buy-the-dip mentality to a sell-the-rip mentality in asset markets. It would also be your queue to pivot defensively from a factor tilt perspective. Until then, we remain constructive on risk in accordance with the “transitory GOLDILOCKS” that we co-authored with our friend Bob Elliott in January.

The US Economy Remains As Resilient As Ever

Last week’s +1.8pt MoM advance in the ISM Services PMI (54.5 = 6mo high) was adequately presaged by the New York Fed’s Services Survey a couple of weeks ago. The New Orders PMI hit a 6mo high as well alongside the highest reading in the Employment PMI since Nov-21.

The probability of a near-term recession continues to dwindle because the services sector accounts for 86% of Total Nonfarm Payrolls.

Offsetting the positivity was the 4mo high in the Prices PMI, which is now trending higher again. If the inflation narrative devolves sooner than our qualitative research views anticipate, we could be in the early innings of a market crash.

China’s Crude Oil Imports accelerated to 30.9% YoY in August, fanning the flames of an ill-timed, hazardous breakout in energy prices.

All eyes on Wednesday’s August CPI report to confirm or disconfirm the prevailing “immaculate disinflation” theme, which itself is one-half of the “transitory GOLDILOCKS” theme we co-authored in mid-January (with the other being “resilient US economy”).

A Crude Reality for Stocks?

Darius recently sat down with Maggie Lake to discuss the energy sector, the labor market, the resiliency of the U.S. economy, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The 42 Macro Weather Model Suggests Investors Should Be Operating With Average-to-Below Average Position Sizes Across All Asset Classes Except Cash

Our 42 Macro Weather Model projects the three-month outlook for stocks, bonds, the dollar, commodities, and Bitcoin by analyzing specific indicators within the following ten components of macro:

Currently, the Weather Model indicates a neutral three-month outlook for stocks and bonds and a bearish three-month outlook for the dollar, commodities, and Bitcoin. 

Our daily systematic scoring of key fundamental and technical indicators suggest this is not a great time to be taking a lot of risk in financial markets.

2. The August Jobs Report Will Likely Perpetuate Additional Right-Tail Risk In The US Equity Market Specifically

In the August jobs report:

In its current “Goldilocks” state, the labor market is too hot to spark further tightening from the Fed but too cold to raise recession fears. 

We can persist in this state for several months, which may create additional right-tail risk in the equity market as underperforming professional investors stare down career risk heading into yearend.

3. Near Record Cash on Household Balance Sheets Is Supporting The Resiliency of The US Economy

Our Cash on Household Balance Sheets calculation tracks the Federal Reserve, flow of funds, checkable deposits, and money market fund exposure for both the household and corporate sectors.

The household sector maintains 3% of total assets, or $4.5 trillion, in checkable deposits – approximately $3 trillion more than its pre-COVID values.

The corporate sector checkable deposits also sit around 3% of total assets as well. 

Including money market fund exposure, we are currently witnessing the highest levels of cash on the private sector balance sheet as a % of total assets since the 1950s.

That’s a wrap! 

If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
  2. RT this thread and follow @42Macro and @42MacroWeather.
  3. Have a great day!

Will Bitcoin Crash Before The Halving?

Darius recently sat down with Anthony Pompliano to discuss global liquidity, bitcoin, the Fed, and more.


If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The Years Leading Up to Bitcoin Halvings Are Extremely Volatile. 

When we analyzed the past Bitcoin halvings from November 2012, July 2016, and May 2020, we found that in the years leading up to the halving, Bitcoin tends to have three drawdowns of more than -20% on a median basis.

All drawdowns in the year leading up to halvings have a median decline of -27%. 

We believe Bitcoin will be much higher in a few years, but it will likely require a rough path to reach its destination. 

2. Over The Next Year, Liquidity Will Determine Bitcoin’s Path.

On a median basis, Bitcoin increases 144% in the year leading up to halvings.

These increases have closely followed global liquidity cycles; the liquidity cycle bottomed in 2012 and 2015, years leading into the halvings where Bitcoin increased 384% and 144%, respectively.

However, in 2019, when liquidity conditions were less favorable than in 2011 and 2015, Bitcoin failed to see a similar price increase. 

The increase that year was only 20%, and the drawdowns were more significant than in the previous pre-halving years.

The amount of liquidity in asset markets will decide Bitcoin’s path over the next year.

3. We Believe The Fed Will Be Forced to Increase Their Inflation Target From 2% to 3%

The change will likely come in two phases:

That’s a wrap! 

If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
  2. RT this thread and follow @42Macro and @42MacroWeather.
  3. Have a great day!

All Things Macro

Darius recently sat down with Nick Halaris to discuss proper risk management, the labor market, inflation, asset markets, and much more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Investors Are Doing A Great Disservice To Themselves By Not Being Bayesian

At 42 Macro, we use three core tenants to form our systematic macro risk management process:

We urge our readers to infuse proper risk management in their investment strategies. We welcome you to use our tools if you want to gain a systematic edge in the market: https://42macro.com/sampleresearch.

2. Labor Hoarding Has Contributed To The Resilience Of The US Economy

The most recent US Total Labor Force SA reading was 167 million people – a value below its trendline since 2009. 

Conversely, Gross Domestic Income recovered its trendline approximately 18 months ago and remains above it. 


The discrepancy in strength between the two indicators suggests there is a large amount of cash in the economy that can be used to demand goods and services but insufficient labor to supply those goods and services.

3. History Tells Us The Fed Must Break The Economy to Achieve Its Price Stability Mandate

We analyzed every recession since 1969 and found that, on a median basis, core PCE inflation is almost always flat-to-up in the year leading up to a recession.

Historically, inflation does not break down without a recession.

Both this study and our HOPE+I framework confirm that inflation is a lagging indicator, and we believe it will again fail to fall below the Fed’s 2% target without a recession.

That’s a wrap! 

If you found this blog post helpful:

  1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
  2. RT this thread and follow @42Macro and @42MacroWeather.
  3. Have a great day!

Evidence Of A Potential Wage-Price Spiral

The ~150,000 member United Auto Workers (UAW) union has declared “war” on Detroit’s big three auto makers GM $GM, Ford $F, and Stellantis $STLAM IM, threatening a strike by September 15 if the companies fail to acquiesce to demands that include a +46% wage increase and a decline in the work week to 32 hours. If a new collective bargaining agreement cannot be achieved by the deadline, the strike will be joined by Unifor — Canada’s largest labor union with ~315,000 total workers and ~18,000 auto workers.

Stories like this are supportive of our view that the narrative around inflation is likely to shift from “immaculate disinflation” to “sticky inflation” within 3-6 months. We have been keen to call out the elevated probability of a soft landing in the US economy. While a soft landing is not our modal outcome, we believe it is a scenario worth educating you on because a soft landing in the economy is highly likely to result in a soft landing in inflation relative to the Fed’s 2% target — which Powell went out of his way to quadruple down on last Friday at Jackson Hole.

No firm on global Wall Street has had a more accurate view on the resiliency of the US economy than @42Macro has for the past year and, as a result, a better call on bonds. We still see more fixed income volatility in the months ahead because we believe the consensus narrative surrounding inflation is likely to deteriorate before the recession hits.