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Where Are Asset Markets Headed? 

Darius joined Charles Payne earlier this week on Making Money to discuss where markets are likely headed.

If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets: 

Over The Next Few Months, We Believe The Stock Market Will Continue to Rally, And Dips Will Be Shallow. 

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!

Immaculate Disinflation?

Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss Immaculate Disinflation, Soft Landing, the Consumer, and more.

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

1. There Is A High Probability That We Continue to Experience Downward Momentum in Inflation Over The Coming Months And Quarters

The Core PCE Deflator, which is the Federal Reserve’s preferred gauge for inflation, alongside the Supercore PCE, are both showing clear signs of deceleration. 

The deceleration is evident as the 3-month annualized rate of change is below the 6-month rate, which in turn is lower than the year-over-year rate. 

Additionally, the 3-month SAAR of Core PCE inflation is hovering around 2 to 2.5%, a range that aligns with what the Federal Reserve is comfortable with. 

Given these trends, there is a high likelihood that we will see continued downward momentum in inflation in the upcoming months and quarters.

2. Asset Markets Recently Transitioned to A Goldilocks Regime That May Prove Easy To Sustain Into 1H24

Our research indicates that the economy transitioned to a “Goldilocks” regime approximately two weeks ago.

We believe the economy can remain in the Goldilocks regime over the next few quarters, provided we avoid slowing to a below-trend pace in real GDP growth.

Current consensus estimates forecast a growth of 1% quarter-over-quarter (QoQ) annualized for the fourth quarter and a more modest 0-0.5% QoQ annualized for the first and second quarters of the coming year. 

If GDP growth aligns with these dovish projections in the forthcoming quarters, it could heighten investor expectations for a soft landing of the economy.

3. Recent Data Show The Consumer is Stable

Last week, we received updated Personal Consumption Expenditures and Income data that show the consumer is holding up well:

If the labor market remains stable, consumers should continue to fare well.

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!

Macro Market Outlook

Darius sat down with Andy Constan last week on 42 Macro’s Pro to Pro discussion to explore the US Treasury, fiscal stimulus, and the US dollar.

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

1. While The US Treasury Has Been Capitalizing on Strong Demand for Short-Term T-Bills, It Is Also Considering Issuing Longer-Term Coupon Bonds

Although the US Treasury has continued to flood the market with T-bills over the past three quarters to tap into excess demand via the Fed’s Reverse Repo Facility, they may begin to issue longer-term coupons.

The decision to issue more long-term debt is influenced by the current low or negative term premium, which makes issuing longer-term bonds cheaper for the Treasury. 

2. Fiscal Stimulus, Which Has Been A Major Contributing Factor to The Resiliency of Household Income, Has Peaked

In 2023, the US economy featured a record non-war, non-recession budget deficit. 

However, the impulse peaked earlier in 2023 and has shown signs of moderation: the budget deficit on a YTD, YoY basis was up $834 billion in June, $535 billion in August, and now only $255 billion in October. 

As a result of the slowing impulse, we believe we will return to more typical levels of government spending and budget deficits. 

The challenges faced by investors due to the previously high levels of Treasury debt issuance are likely behind us… for now.

3. Is The US Dollar Entering A Bear Market?

We expect the US Dollar to decline if we continue to get data that supports a soft landing.

Additionally, our research suggests the US dollar is overvalued on a real effective exchange rate basis and relative to current inflation dynamics and that the path of least resistance for the dollar is down.

However, the Fed is currently adopting a more restrictive policy than the rest of many central banks worldwide, supporting the dollar. 

This approach tends to attract foreign investment seeking higher returns, which increases the demand for and drives up the value of the U.S. dollar. 

While there is a push-pull between these dynamics, we believe there is a credible path to a bear market for the US dollar. 

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!

Why We Are Likely To Have A Worse Recession Than Investors Now Anticipate

Darius sat down with Julia La Roche last week to discuss inflation, the Fed, and the likelihood of a recession.

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

1. A Recession Has A High Probability Of Commencing Over The Next 6-9 Months

Our team has conducted extensive backtests on recession timing after the inversion of the 10-year/3-month treasury yield curve.

We found the 13 – 18 month forward interval has the highest probability of GDP contraction and a rise in the unemployment rate.

The 10-year/3-month yield curve inverted in October 2022, indicating the period between Nov-23 and Apr-24 has the highest probability of the start of a recession.

2. Inflation Will Likely Bottom At A Level Inconsistent With The Fed’s 2% Mandate

Our research suggests Core PCE will likely trend 50% – 100% higher throughout this decade.

In the last decade, the underlying trend of Core PCE YoY was 1.6%. We project that trend will increase to somewhere between 2.5% to 3.1% over the next decade, and prolonged conflict in the Middle East may cause a spike in commodity inflation and push it even higher.

We believe the Fed will need to revise its inflation target upwardly to between 2.5% and 3% to account for the upcoming higher trend. 

3. Sticky Inflation Will Force The Fed To Sit On Its Hands 

Wall Street survey data shows an increasing number of investors believe the probability of avoiding a recession is high.

We challenge that view. We believe a recession is likely to begin with inflation measures tracking at levels uncomfortably higher than the Fed’s 2% inflation target. That means the Fed will likely be forced to sit on its hands and maintain higher rates until inflation declines.

If that happens, the recession will likely be worse, and asset markets will likely decline further than most investors now expect – after having been dead wrong the US business cycles and asset markets all year.

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!

What’s Driving Global Liquidity?

Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss all things Global Liquidity.

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

1. The Recent Surge In The Dollar Has Negatively Impacted Global Liquidity

Our 42 Macro Global Liquidity proxy, a sum of global central bank balance sheets, global broad money supply, and global FX reserves minus gold, is a key driver of risk assets like equities and bitcoin.

Since mid-July, the US Dollar has rallied aggressively. This rally weighed on global liquidity because the Dollar and FX volatility are negatively correlated to global liquidity.

If we see a breakout in currency volatility, which is in the process of occurring according to our Volatility-Adjusted Momentum Signal, the negative global liquidity impulse could continue to decline, negatively impacting risk assets. 

2. Currency And Interest Rate Volatility Have Hampered Private Sector Liquidity

Most retail investors think of liquidity solely in terms of whether or not central banks are supplying liquidity to the global financial system. 

Private sector agents like commercial banks and non-bank lenders – primarily from net international investment surplus economies like Europe and Japan – also supply liquidity, referred to as “private sector liquidity.”

Recent currency and interest rate volatility have made it difficult for these private sector agents to supply liquidity to the system, impeding the overall global liquidity supply.

3. The Dollar Could Reach Its Highs From Last October If It Slows Its Trajectory

If the dollar continues its aggressive trend over the next few months, the Fed may have to step in and intervene because it will likely coincide with something “breaking” in the Treasury market. 

But, if the dollar slows its trajectory and grinds its way higher, we believe it may reach its highs of $113 from October of last year in DXY terms.

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!

Is Goldilocks Going to End Soon?

Darius sat down with Mike Ippolito last week on the On The Margin podcast to discuss the FOMC, interest rates, inflation, and more.

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

1. We Believe The Projections From The September FOMC Meeting Are Wishful Thinking

In the September FOMC meeting, the FED hiked its 2024 and 2025 median dot plot estimates by 50 basis points.

Despite these hawkish revisions to its growth and labor market estimates, the Fed still sees Core PCE decelerating by 3.7% by year-end, 2.6% by 2024, 2.3% by 2025, and 2.0% by 2026.

We disagree with the Fed’s projections and believe they will need to engineer a recession to bring down inflation to below-trend levels.

2. The Fed Will Likely Need to Cut Rates More Than What The Market Is Currently Pricing

The current Fed Funds futures pricing shows the expectation that the Fed will begin cutting rates mid-2024 – we believe this current pricing is misguided. 

Our research shows that a recession is the modal outcome, so we believe the Fed will need to cut by more than what is currently priced.

The 10-year three-month treasury yield curve, an indicator that has successfully predicted a recession eight out of the nine times it has inverted since its inception – and eight of the last eight – continues to be deeply inverted and supports our view.

3. Inflation Will Likely Trend Higher In The Coming Months 

Our research shows that the median Core PCE delta in the year leading up to a recession is +5 bps, suggesting Core PCE is generally ‘flat to up’ in the year preceding a recession. 

Additionally, the three-month annualized rates of the different indicators of the inflation basket have halted their downward trend. Although the headline YoY numbers may continue to decelerate, we are seeing increases in specific indicators like:

We believe that many of the indicators that make up the inflation basket will trend higher in the next few months and will not decline to below-trend levels until we go through 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 @DariusDale42 and @42Macro.
  3. Have a great day!

The Current State of China

Darius sat down with Anthony Pompliano last week to discuss China’s economic landscape.

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

1. The Evergrande Debt Default May Have Spillover Effects on The Broader Chinese Economy

One of Evergrande’s subsidiaries recently defaulted on nearly 600 million dollars worth of principal and interest payments.



The implications are significant for two reasons:

A bankruptcy of Evergrande’s size could lead to knock-on effects for the Chinese economy.

2. If China Does Not Issue Large-Scale Fiscal Stimulus, They Will Likely Remain In Their Liquidity Trap.

China and Japan supplied trillions of dollars in global liquidity from Q4 2022 to Q1 2023, a primary factor in the BTC and stock market recovery we have seen so far this year.



But if China does not issue large-scale fiscal stimulus, they will likely fall back into their “liquidity trap”:

Today, China’s economy looks very similar to Japan’s from the early 1990s. 

3. Just Because The Chinese Economy Has Downshifted From A Growth Perspective Does Not Mean It Will Stop Demanding Energy Products

The volume of Crude Oil imports is near all-time high levels established in 2020.

Conversely, the volume of Copper imports is down 38% from the 2020 highs. 

This is significant because Crude Oil creates inflation across the global economy, while Copper more closely signifies underlying demand for materials and goods and is correlated to growth.

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!

Get Ready For ‘Markets Gone Wild’

Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss Bitcoin, the stock market, the probability of a recession, and much more.

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

1. The US Equity Market Still Has Significant Right Tail Risk Over The Next 3-6 Months

The stock market has historically performed well heading into a recession:

Our research currently indicates a blow-off top in equities in the months ahead given – especially given the starting point of severely depressed investor sentiment. 

2. We Believe The Most Likely Path Forward Is For The Economy to Devolve Into A Mild Recession

Prior to deep recessions, credit typically increases as banks extend credit to less credit-worthy borrowers. 

Then, when the economy experiences a tightening of monetary or fiscal policy, the effects are amplified by the large amount of credit present in the financial system.

Today, we have limited credit cycle vulnerabilities, indicated by:

These indicators suggest the recession will likely be moderate because the economy has not experienced the rapid build-up of credit that usually occurs before deep recessions.

3. Bitcoin Will Underperform Stocks Until A Recession Or Sovereign Debt Crisis Forces Central Banks To Pivot

We expect Bitcoin to struggle over the next few quarters until we find a bottom amidst the recession.

If stocks experience a drawdown of 24%, their median drawdown in a recession, Bitcoin will likely fall orders of magnitude further. 

Our 42 Macro Global Liquidity Proxy, measured by the aggregated sum of the global central bank balance sheets, global broad money supply, and global FX reserves minus gold, has been trending lower and will likely decline further over the medium term.

Still, we believe Bitcoin will trend significantly higher in the coming years. But we likely will not see a meteoric rise without a recession or significant problem in the sovereign debt markets that causes the stimulus to put Bitcoin on that path. 

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!

Stocks To Surge & Bonds To Sell Off Before Recession Hits By Early 2024

Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss inflation, the labor market, the probability of a recession, and much more.

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

1. A Resilient US economy Leads to A Resilient Labor Market

The labor market has remained relatively resilient:

Labor market conditions are likely to remain robust until the spring of next year. 
 

2. “Immaculate Disinflation” Will Give Way To “Sticky Inflation” In The Coming Months

We believe the Immaculate Disinflation that has occurred will likely run out in the coming months. Historically, the US economy has always required a recession to bring inflation back to a below-trend level.

Our HOPE+I framework looks at how unique baskets of indicators representing the housing, orders, production/profits, employment, and inflation cycles have historically behaved around recessions.

 

The framework shows that inflation typically breaks down 6 – 8 months after a recession starts.

There is no historical evidence to anticipate anything other than inflation exhibiting a similar pattern in this business cycle.

3. The Spread Between Labor Demand And Labor Supply Will Likely Remain Positive For Several Quarters

The most recent US Total Labor Force SA reading was 168 million people – a value below its 2009 to 2019 trendline. 

Conversely, Gross Domestic Income recovered its trendline approximately two years ago and remains above it. 

Looking at the spread between labor demand and labor supply, we found that labor demand outpaces labor supply by approximately 2.5 million workers. 

This spread will likely take a few quarters to return to zero and has sticky implications for workers’ bargaining power for their wages because the spread has historically been correlated to the annual change in the Private Sector Employment Cost Index.

 
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!

What is the Bond Market Signaling?

Darius recently sat down with Ash Bennington on Real Vision’s Daily Briefing to explore the bond market, inflation, FOMC, and more.

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

1. The Resilient US Economy Is Likely To Perpetuate The Bear Steepening in The Bond Market

The economy has been and will continue to be resilient for the following ten reasons:

We expect the resilient US economy theme will continue for the next three to six months and continue to perpetuate the bear steepening in the bond market.

2. We Challenge The Fed’s New Economic Projections 

This week’s FOMC meeting produced a “goldilocks” summary of economic projections:

With these projections, the Fed implicitly states that we will get more growth and better labor market conditions while still having a soft landing in inflation.

We disagree with the Fed’s view on this, as our research shows that inflation typically breaks down six to eight months into recession. 

3. Is 3% the new 2%?

Our secular inflation model indicates that we will have 50-100% more trend Core PCE inflation in this decade relative to the last decade. 

We track a basket of indicators correlated with the underlying trend of inflation that indicates the underlying trend is headed to 2.5% in this decade. 

Additionally, when you weigh the model on each indicator’s impact, the core PCE trend goes from 1.6% to 3.2%, equating to a 3.5% trend in headline CPI. 

Our models indicate that 3% may be the new 2% – both in terms of the trend in inflation and the Fed’s likely-to-be-revised inflation target. 

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!