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Will The US Economy Enter A Recession?

Darius sat down with Chris Berg recently to discuss the outlook for asset markets, the probability of a recession, the Fourth Turning, and more. 

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

1. The US Economy Is Likely to Avoid A Recession In 2024 If Productivity Growth Remains Above Trend

Productivity, as measured by output per hour in the US labor market, is showing robust growth at 2.7% year-over-year, surpassing the 10-year, 30-year, and 50-year averages of approximately 1.7%.

To achieve a soft landing, at least two of the following three conditions are typically required:

  1. Sustained at-trend or above-trend productivity growth
  2. Rate cuts
  3. At-trend or above-trend fiscal spending

Presently, productivity is above-trend, money markets have effectively already priced in rate cuts, and we are likely to see above-trend fiscal spending in the current election year.

In the event of a recession, our analysis suggests that it is unlikely to materialize until 2025 at the earliest.

2. We Believe The No-Landing Scenario Is Likely to Become The Modal Outcome Over The Next One to Two Quarters

While a soft landing signifies achieving at or below-trend growth, facilitating the return of inflation to the Fed’s 2% target, a no-landing scenario entails sustaining growth at or above trend levels, preventing disinflation from bottoming at 2%. Conversely, a hard landing is a scenario where the economy enters into a recession.

In the past four months, there has been a notable decrease in the likelihood of a hard landing. Meanwhile, the probability of a no-landing scenario is on the rise, although a soft landing remains the modal outcome for now.

However, we anticipate that the no-landing scenario is likely to become the modal outcome over the next one to two quarters. This expectation stems from our belief that nominal real economic growth is poised to surprise to the upside through the first half of this year across major economies worldwide.

3. The Fourth Turning Will Have Significant Implications For Investors’ Portfolios

Last fall, our team performed an empirical deep dive on the Fourth Turning, a theory sparked by Niel Howe, mentor and former colleague of 42 Macro CEO Darius Dale. While there may be some erosion in our reserve currency status during the Fourth Turning, we maintain the belief that the United States is unlikely to lose its position as the world’s reserve currency.

Moreover, we could experience a strengthening dollar as lenders and borrowers around the world favor financing in other currencies at the margins, resulting in a continuation of the underlying dollar short squeeze that has been ongoing since 2014. If we do, it would likely necessitate the Federal Reserve to counteract through measures such as currency debasement and financial repression.

Regardless of your outlook on asset markets in the long term, we emphasize the importance of focusing on the current and upcoming Market Regime as the optimal path to navigate through these growing uncertainties.

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 The Pivot to A REFLATION Market Regime Means For Asset Markets

Darius sat down with Julia La Roche last week to discuss the recent transition to REFLATION, inflation, rate cuts, and more.

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

1. REFLATION Is Now The Top-Down Market Regime

Last week, we experienced a Market Regime shift from the perspective of our 42 Macro Global Macro Risk Matrix from GOLDILOCKS to REFLATION. 

REFLATION introduces a distinct set of Market Regime guidelines that investors should consider for their portfolio construction:

Given that both GOLDILOCKS and REFLATION are both risk-on regimes, investors may not need to make significant adjustments to their portfolios for this particular regime transition.The big pivot investors must make in a GOLDILOCKS-to-REFLATION phase transition is being incrementally longer of Risk Assets relative to Defensive Assets. 

2. “Sticky Inflation” Is Likely To Be A Consensus Theme By The End of The REFLATION Market Regime

The January CPI Report revealed signs of sticky inflation:

Given the apparent lack of restrictiveness of the current policy in place by the Fed and the resilience of the labor market, a return to 2% inflation seems unlikely at this current juncture.

Moreover, a divergence between CPI and PCE Deflator statistics has emerged in recent months. We believe this divergence is likely to persist for another one to two quarters, allowing the “immaculate disinflation” theme to continue and asset markets to rally during this period.

3. Money Markets Are Pricing In A More Aggressive Rate Cutting Cycle Compared to The Fed’s Dot Plot Projections

The conventional wisdom among average investors is that rate cuts are only observed when the Federal Reserve begins to lower the policy rate. However, the reality is more nuanced – asset markets, not just in the US but across major economies, are deeply influenced by broader financial conditions rather than solely relying on the observed level of the policy rate. 

At 42 Macro, we review policy rates set by the Fed, ECB, Bank of England, and Bank of Japan, as well as the overnight index swap rates relative to the policy rate, which reflects market expectations regarding rate hikes or cuts over the next 3, 6, 9, and 12 months. For the past six months, we have consistently observed negative spreads across OIS curves for the Fed, ECB, and Bank of England. 

From our standpoint, this suggests that the rate cuts have effectively already occurred. Looking ahead to the next quarter or two, we anticipate observing incremental evidence of eased financial conditions.

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!

How Long Will The Fed Hold?

Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss the recent transition to REFLATION, NVIDIA earnings, China, and more.

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

1. The Market Regime Transitioned From GOLDILOCKS to REFLATION Last Week

We utilize the 42 Macro Global Macro Risk Matrix to nowcast the prevailing Top-Down Market Regime. We do this via scoring the 42 most crucial macro markets globally via our Volatility Adjusted Momentum Signal (VAMS) and GRID Asset Market Backtests. These scores are then tallied, with the regime encompassing the highest number of markets emerging as the Top-Down Market Regime.

As of last week, REFLATION, characterized by a risk-on environment where investors tend to be rewarded for assuming higher risks due to perceived acceleration in nominal economic growth or better than expected economic performance without policy constraints, now holds the largest share of confirming markets. 

We anticipate that this risk-on Market Regime is likely to persist until around midyear. For consistent performance, investors should align their portfolios in accordance with the prevailing Top-Down Market Regime.

2. The Tech Bubble Is Likely to Persist At Least Until Around Midyear

In its quarterly earnings release last week, NVIDIA reported a revenue of $22.1 billion, surpassing analysts’ estimates by $1.7 billion, which had projected revenue to be $20.4 billion. 

Prior to the release, the 42 Macro Positioning Model indicated that positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds indicated a probability of a further short-term market correction. The earnings release indicated NVIDIA beat their revenue estimates by 8%, and despite a temporary dip in response to the news, the stock surged by 24% over the next two days.

We don’t believe the tech bubble is likely to become unwound at this current juncture, especially if REFLATION persists as the Top-Down Market Regime over the next quarter or two.

3. PBOC Policies This Year Have Largely Supported Asset Markets 

Since December, we’ve called for Beijing to implement front-loaded policy support as we entered 2024. 

That’s what we’ve witnessed, as the PBOC has been actively implementing monetary policies to support the economy. Its balance sheet is expanding, claims on banks are rising, and it is reducing the loan prime rate while committing to providing additional lending to specific sectors of the economy. 

Through these measures, the PBOC is attempting to revive the Chinese economy. Instead, it is positively contributing to global liquidity, bolstering the risk-on Market Regime in asset markets.

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!

Navigating Shifts In Global Liquidity

Darius sat down with Gordon Johnson last week to discuss the macro outlook for asset markets, the fourth turning, China, and more.

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

1. US Liquidity Is Likely to Peak Around Midyear 

The Federal Reserve has significantly increased the supply of Treasury bills, accounting for 69% of the total net marketable borrowing on a TTM basis through the first quarter. 

This has led to a reduction in the RRP and an injection of liquidity into the financial system, supporting asset markets. However, this trend is likely to shift in Q2, with the proportion of Treasury bills in net marketable borrowing dropping to 49% on a TTM basis. 

As a result, the drain on RRP will likely be halted, potentially impacting the favorable liquidity conditions supporting the stock market’s recent positive performance.

2. During The Fourth Turning Regime, Inflation Is Likely to Remain Elevated

Our research indicates that Headline CPI typically exhibits faster growth during Fourth Turning regimes, averaging 2.1%, in contrast to the 1.2% observed during the First, Second, and Third Turnings. 

As a result, we anticipate a shift towards a more inflationary climate over the next decade, diverging from the relatively stable price levels experienced in recent decades.

Consequently, this evolving landscape is likely to prompt the Federal Reserve to engage more actively in debt and deficit monetization, a trend we believe is likely to intensify over the coming decade.

3. China’s Structural Liquidity Trap

China is currently facing a structural liquidity trap, similar to the situation Japan encountered starting in the early 1990s. In this structural liquidity trap, additional credit growth in China is not effectively fueling economic expansion. Instead, it is primarily being used to roll over existing debt, allowing them to refinance current obligations.

Moreover, the expansion of the PBOC’s balance sheet has been largely driven by China’s foreign exchange reserves, a trend that halted in 2015. That said, incremental policy adjustments such as reducing the reserve requirement ratio (RRR), cutting loan prime rates, and bolstering medium-term financing are creating positive global liquidity conditions. 

These policy measures have had a positive impact on asset markets and have been contributing to the current GOLDILOCKS Market Regime. 

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 Global Liquidity Push Bitcoin To All-Time Highs?

Darius sat down with Anthony Pompliano last week to discuss the outlook on asset markets, global liquidity, Bitcoin, and more.

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

1. While There Is An Elevated Risk of A Short-Term Market Correction, The Outlook For Asset Markets Remains Bullish Over The Medium-Term

The 42 Macro Positioning Model indicated that retail positioning had been heavily overweight stocks.

However, after the recent correction, that overweight positioning has dissipated. Despite this, current positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds suggest the possibility of a further short-term market correction.

Looking ahead, the medium-term perspective is likely to be more optimistic. We are still in GOLDILOCKS, and the 42 Macro Weather Model indicates the Top-Down Market Regime has a high probability of remaining in a risk-on condition, either GOLDILOCKS or REFLATION, over the next three months.

2. Global Liquidity Heavily Influences Asset Markets

The 42 Macro Global Liquidity Proxy, an estimate for Global Liquidity, is calculated by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold.

The 42 Macro Global Liquidity Proxy is highly correlated to most assets, including corporate bonds, treasury bonds, crypto, and stocks. Only trend stationary markets like currencies and commodities fail to have a significantly high degree of correlation and/or correlation to the 42 Macro Global Liquidity Proxy.

Understanding the drivers of global liquidity, such as potential shifts in central bank policies, variations in credit growth across different economies, and other pivotal factors, is crucial for investors. By closely monitoring these drivers and tracking leading indicators of global liquidity, investors can better position themselves to navigate market risks and capitalize on emerging opportunities.

3. Bitcoin Is Likely To Appreciate Significantly Due To Fourth Turning Tailwinds  

The flows into the various Bitcoin ETFs over the past couple of weeks suggest growing investor confidence in Bitcoin’s viability. We believe this momentum is likely to continue. 

In the context of the Fourth Turning regime, which is likely to span the next decade, our research suggests an environment marked by structurally elevated inflation and budget deficits. These conditions are likely to spark a surge in demand for alternative assets like Bitcoin. 

Although there will be periodic downturns, we maintain a long-term outlook that Bitcoin’s value is likely to appreciate significantly.

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!

Navigating Bullish Horizons

Darius sat down with Erik S Townsend and Patrick Ceresna on Macro Voices last week to discuss our systematic portfolio construction process, corporate profits, fiscal policy, and more. 

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

1. A Rebound In Corporate Profits And Productivity Growth Suggests The Probability of A Soft Landing Remains High

The 42 Macro Corporate Profitability model, which tracks the spread between Gross Domestic Income growth minus the spread between Unit Labor Cost growth and Productivity growth, shows that corporate operating margins bottomed a few quarters ago and have improved since. 

This rebound indicates that corporations have a reduced need to shed costs through layoffs or to increase prices for consumers.

This recovery in corporate profits, along with the sharp recovery in productivity growth, suggests the economy may remain resilient, and the probability of a soft landing remains high.

2. Although It Is Shrinking, Fiscal Impulse Is Still Positive At The Margins

The fiscal 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, $255 billion in October, $320 billion in November, and $364 billion in December.

Contributing factors to the fiscal dynamics of 2023 included unique events such as the reduction in individual income taxes due to tax collection disruptions in California and Hawaii, alongside a significant cost of living adjustment spike last year. 

These specific drivers are not likely to recur in 2024 – meaning the fiscal impulse is dissipating at the margins. That said, it is unlikely to fall off a cliff.

3. China’s Fiscal and Credit Dynamics May Lead to An Uptick In Global Commodity Prices And Emerging Markets investments Over The Medium-Term

China’s credit growth and fiscal spending typically peak in the first quarter of the calendar year, as Beijing often front-loads its policy support. 

Moreover, according to our 42 Macro China Liquidity Proxy, January marks the third consecutive month in which China’s liquidity impulse has shown a positive trend. 

Furthermore, Chinese economic growth has stabilized, with the China Composite PMI climbing to 52.6 in the latest reading. This stabilization, particularly when set against modest expectations, may lead to an uptick in global commodity prices and emerging markets investments over the medium term.

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 There Still A Risk of Recession?

Darius sat down with Anthony Pompliano last week to discuss interest rates, the Fed, the election year, and more. 

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

1. Lower Worker Turnover Is Supportive of Economic Expansion

The Federal Reserve is closely monitoring the ratio of JOLTS Total Job Openings to Total Unemployed Workers as a measure of labor market slack or tightness. This ratio currently stands at 1.4, which remains above its pre-pandemic levels, indicating a tight labor market that is still relatively tight. 

The Private Sector Hires Rate, holding steady month-over-month at 3.9%, is below the trend observed from 2015 to 2019, suggesting a cooling in hiring momentum. The Private Sector Quit Rate (PSQR) declined to 2.4%, its pre-pandemic level. 

Lower turnover rates, as observed in recent quarters, are supportive of economic expansion by alleviating wage pressure within the labor market.

2. The Probability of A Recession Remains Low

At 42 Macro, we have identified five key leading indicators that are most effective in helping investors predict and position for recessions in their portfolios: the University of Michigan Employment Survey, the Conference Board Labor Survey Differential, the Continuing Claims/Total Labor Force ratio, Cyclical Unemployment, and Temporary Employment.

Among the 42 Macro Fab Five Recession Signaling Indicators, only the Temporary Employment metric signals a significant risk of recession. In contrast, three of the indicators suggest a low probability, and one presents a moderate risk level. 

As a result, we believe the likelihood of a recession remains low at this current juncture. 

3. Asset Markets Are Likely To Generate Positive Returns Throughout 2024

Several positive factors, including a positive fiscal impulse, a resilient economy, and declining inflation, are currently bolstering asset markets. Additionally, stock markets tend to perform well during an election year, especially when the incumbent candidate is from the Democratic Party. 

However, the landscape is somewhat different now compared to the beginning of last year, marked by a decrease in both underpositioned investors and companies trading at reasonable valuations.

Consequently, while we do not anticipate the S&P 500 to replicate its 20% performance from last year, we do believe it may achieve positive gains in line with historical average returns.

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!

Green Shoots or Rising Risk?

Darius sat down with Ash Bennington last week on Real Vision’s Daily Briefing to discuss the probability of a soft landing, the outlook for asset markets, and more. 

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

1. The Recent Inflection in The Sovereign Fiscal Balance to Nominal GDP Ratio Indicates A Slightly Less Bullish Outlook for Asset Markets

Our models indicate asset markets are becoming less bullish at the margins.

We have seen a notable shift in the Sovereign Fiscal Balance to Nominal GDP Ratio, transitioning from a negative to a positive trend. This shift indicates a reduction in the fiscal stimulus that has previously bolstered the resilience of the US economy. 

While these changes signal a more cautious outlook for asset markets at the margins, they do not pose significant concerns at the current juncture.

2. The Probability of A Soft Landing Remains High

Recently, we have witnessed a rebound in productivity growth.

This upswing in productivity is significant because to achieve a soft landing, at least two of the following three conditions are typically required:

  1. Sustained at-trend or above-trend productivity growth
  2. Supportive monetary policies from the Federal Reserve
  3. At-trend or above-trend government expenditures

Encouragingly, all three conditions have been met in recent months, significantly boosting the likelihood of a soft landing. As of now, the outlook remains positive, with few indicators suggesting the GOLDILOCKS regime is likely to change in the short term.

3. Throughout 2024, Strength Across The Major Global Economies May Cause An Upside Surprise in Asset Markets 

The latest January Global Composite PMI data indicates a bottoming in the UK, Eurozone, Japan, and Global PMIs, signaling a collective upswing in economic activities across these regions.

Additionally, signs are emerging that point towards potential factors that may lead to growth surprises, which in turn could bolster asset markets vis-a-vis a weakening dollar, enhanced global liquidity, and improved earnings projections.

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 Massive Stock Market Rally Is Pricing In A Soft Landing

Darius sat down with Mike Ippolito last week to discuss the private sector balance sheet, how the election year will impact asset markets, Bitcoin, and more.  

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

1. The Private Sector Balance Sheet Has Remained Resilient

Currently, household balance sheets are exceptionally flush with cash reserves. 

Similarly, household leverage is cyclically depressed, and the Debt-Service Ratio for households is structurally depressed. 

In fact, the last time the U.S. witnessed such a substantial proportion of cash on both corporate and household balance sheets was in the 1950s. 

These levels of cash on balance sheets underpin the resilience of the U.S. economy, and we believe the recent monetary tightening we have experienced to this point has been mostly noise. 

2. Both The Election And Fiscal Policy From Yellen Will Likely Be Supportive of Asset Markets This Year

Historically, election years tend to be positive for asset markets, with the 12-month returns leading up to elections averaging around 8%. 

Interestingly, when a Democrat incumbent is in office, the median return doubles to approximately 15% in the 12 months leading up to the election. 

We believe investors can anticipate positive outcomes for asset markets throughout 2024, with election optimism being a contributing factor. 

Additionally, when considering the Treasury’s recent decisions to support liquidity, we can expect continued positive outcomes in asset markets until that changes.

3. We Believe Bitcoin Will Experience Positive Inflows As Long As We Remain In A Risk On Regime

As long as the economy is in a GODLICKS or REFLATION regime, we can anticipate capital inflows into the cryptocurrency market. 

Additionally, we have experienced a significant increase in liquidity since October that has notably benefited Bitcoin. 

Since then, global liquidity has been on an upward trajectory, supported by liquidity from both the commercial banking sector and the non-banking financial sector.

Furthermore, leading indicators for the liquidity cycle suggest that we are likely to continue seeing positive drivers for liquidity in the medium term. 

However, it is important to note that a shift in the narrative surrounding inflation could pose challenges for asset markets.

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!

A Glimpse Into How 42 Macro Models Work

Darius sat down with Markets Policy Partners last week to discuss the details behind a number of 42 Macro models, inflation, and more.  

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

1. A Look Into How 42 Macro Nowcasts The Current Macro Regime

Our Global Macro Risk Matrix is designed to provide a current snapshot of the market regime from a top-down perspective.

This is important for investors because in order to be consistently profitable, they should align their positioning with prevailing market conditions.

Our process evaluates 42 distinct markets, including broad baskets of assets such as equities, volatility instruments, commodities, currencies, and various fixed-income measures like rates, spreads, and yields, and incorporates a volatility-adjusted momentum signal to assess each market’s performance.

We update the data daily and aggregate the scores for each market. 

Finally, the regime that accumulates the highest total score is identified as the prevailing top-down market regime.

2. Our Macro Weather Model Systematically Nowcasts Momentum Across The Principal Components of Macro

Understanding the current macro regime is just the starting point. 

To be successful, investors must also anticipate the duration of the current market regime and anticipate the transition to the subsequent market regime – especially when a “RORO” phase transition (i.e., risk-on-to-risk-off or vice versa) is increasingly likely. 

The Macro Weather Model is our process for analyzing several principal components of macro and translating those components into a 3-month outlook for major asset classes, including stocks, bonds, the dollar, commodities, and bitcoin.

This model monitors indicators that reflect both the real economy cycles and financial economy cycles:

3. Our Models Indicate Inflation Will Likely Trend 100 to 140 Basis Points Higher This Decade Compared to The Previous One

Since 2020, most forecasting models used on Wall Street, including DSGE and auto-regressive models, faced significant challenges in predicting inflation due to such an unprecedented surge in various economic indicators stemming from the COVID-19 pandemic.

During the decade from 2010 to 2019, core PCE maintained an underlying trend of approximately 1.6%. 

However, our models predict that Core PCE will likely average somewhere between 2.6% to 3.0% throughout the 2020-2029 decade. 

An increase to those levels is likely to cause concern for the Fed and may lead to structural policy adjustments in the future.

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!