Is Bitcoin Data Giving The Green Light?
Darius sat down with Anthony Pompliano last week to discuss global liquidity, the Macro Weather Model, Bitcoin, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Our 42 Macro Weather Model Is Suggesting A Less Bullish Outlook Over The Medium Term
In our previous appearance on The Pomp Podcast, our Macro Weather Model signaled a bullish 3-month outlook for risk assets.
However, as of last week, the model has signaled neutral outlooks for both the stock market and Bitcoin over a three-month timeframe.
While these signals are not explicitly bearish, they indicate a shift toward a more bearish environment.
This change is primarily driven by the Sovereign Fiscal Balance to Nominal GDP Ratio, which has recently inflected to a positive trend.
This implies a lower fiscal impulse compared to 2023, potentially leading to a less favorable environment for risk assets.
2. We Believe Global Liquidity Is Likely To Continue Trending Higher Over The Next Quarter or Two
Our 42 Macro Net Liquidity Model, which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance, is trending higher.
Similarly, our 42 Macro Global Liquidity Proxy, which is calculated by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold, is also trending higher.
Furthermore, leading indicators for both the Net Liquidity Model and Global Liquidity Proxy suggest a sustained positive trend in liquidity for at least the next two quarters.
3. We Expect Bitcoin Will Perform Well Over The Long Term
We recommend investors view Bitcoin simply as an additional asset class to maintain a rational perspective and avoid becoming too emotionally invested in the asset.
That said, it is important to note that the introduction of the ETF is a structurally positive fundamental, likely to boost inflows into this asset class over the long term.
Additionally, our research into the Fourth Turning indicates we will likely experience well-above-trend inflation over the next decade.
As a result, the traditional 60/40 investment portfolio is unlikely to yield the same returns it did in the past decade.
This scenario is likely to prompt investors to seek alternative investment opportunities, and we anticipate a significant portion of this capital redirection towards alternative assets, with Bitcoin being a favored destination among millennial, gen-z, and tech-focused investors.
That’s a wrap!
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Is Your Portfolio Ready for the Next Big Market Shift?
Darius sat down with Cem Karsan on 42 Macro’s Pro to Pro Live last week to discuss corporate profits, inflation, recession, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. The Treasury Continues To Starve The Market Of Coupon Supply
After analyzing the composition of the Treasury’s Net Marketable Borrowing, we found only 27% of the total issuance consists of coupons.
Treasury Secretary Yellen continues to meet the excess demand for T bills in the RRP Balance, which currently stands at approximately $600 billion.
This marks the lowest TTM Coupons to Net Marketable Borrowing ratio since the first quarter of 2018.
2. Corporate Profitability Is Broadly Improving, Reducing The Need For Corporations to Shed Costs And/Or Pass On Price Increases to Consumers
Our 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 Profits bottomed a few quarters ago and have improved since.
We believe corporate profitability will perform better than consensus expectations over the next one to two quarters.
As a result, we believe this may increase the potential for stock buybacks, providing a buffer against any potential downturn in asset markets.
3. Although We Believe Stagflation Is The Most Probable Outcome In The Long Term, Markets Do Not Have to Price That Outcome In Now Or All The Time
Last fall, our team performed an empirical deep dive on the Fourth Turning and its implications for investor portfolios.
Our findings indicate that real GDP growth is usually weak during fourth turnings, while inflation tends to be higher.
From a long-term perspective, we believe stagflation is the most probable outcome. However, markets do not have to price in stagflation immediately or all the time. Right now, asset markets are pricing in a soft landing. That will change at some point over the medium term.
We advise investors to avoid pigeonholing themselves to ‘one camp’ and instead align their positioning with the camp that will make them money for as long as it remains the modal outcome.
That’s a wrap!
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Should Investors Be Positioning For Turbulent Times Ahead?
Darius joined Charles Payne on Fox Business last week to discuss the market outlook, investor positioning, and more.
If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets:
Recent Data Was Supportive of GOLDILOCKS Continuing to Persist, And We Believe Equities Have Room To Run
- The market is currently pricing in GOLDILOCKS as a result of the growing consensus among investors that a ‘soft landing’ is the most likely outcome for markets. If the market begins to believe a ‘no landing’ or ‘hard landing’ is the most likely outcome, asset markets will likely experience a downturn.
- Despite retail traders currently being overweight in stocks, our analysis suggests that broader investor allocations are not at levels that have historically aligned with bull market peaks. This indicates that there is still room for stock market growth from a positioning standpoint.
- The recent December Jobs report and the December ISM Services PMI both support the ‘soft landing’ outcome for markets. Until the majority of key economic data stops supporting the soft-landing consensus among investors, the GOLDILOCKS Top-Down Market Regime is likely to persist.
That’s a wrap!
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What Should You Expect From The Bitcoin ETF?
Darius sat down with Anthony Pompliano last week to discuss the Bitcoin ETF, global liquidity, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Our Wall Street Clients Are Closely Watching The BTC ETF Approval
BTC’s price appreciation throughout 2023 has fueled the excitement among Portfolio Managers and RIAs.
Generally, reception from our institutional clients for the BTC ETF has been warm, and we expect BTC to perform well over the long term as a result.
2. Favorable Market Conditions And An Increase In Tax Efficiency Support Flows to BTC
Many institutional investors have avoided BTC due to the complexities of tax reporting.
An ETF is a tax-efficient investment vehicle, so we expect it will increase inflows into the asset class.
With a vast multi-trillion dollar pool in investment advisory allocations, we believe there will be a shift at the margins from traditional alternative investments like gold, commodities, and real estate towards BTC.
Additionally, we believe the current GOLDILOCKS regime will support inflows into the asset class over the short term.
3. We Expect Global Liquidity to Continue Increasing Over The Medium Term
Over the past two quarters, our 42 Macro Net Liquidity model, which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance, has maintained an upward trend.
Similarly, our 42 Macro Global Liquidity Proxy, which is derived by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold, has also shown an upward trend in the past few quarters.
This model is particularly significant for projecting asset market performance.
In addition, there are a number of leading indicators that support robust private-sector liquidity creation.
Based on these factors, we anticipate a continued increase in liquidity over the medium term.
That’s a wrap!
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Is It Time To Book Gains In Asset Markets?
Darius sat down with Adam Taggart on Thoughtful Money last week to discuss liquidity, investor positioning, the probability of a soft landing, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Rising Liquidity And Policy Support Are Bullish For Asset Prices
Liquidity is rising both domestically and globally.
Although the recovery since the bottom of the liquidity cycle in the fall of 2022 has not been linear, the overall trend is higher.
Key indicators that typically lead the liquidity cycle, such as the US dollar, currency volatility, bond market vitality, and crude oil, all point towards a growing supply of liquidity from the global private sector.
This environment creates a highly bullish context for asset markets – especially if sustained by these indicators and complemented by potential interest rate cuts from the Federal Reserve
2. Our Positioning Model Suggests The Rally Can Continue
Our 42 Macro Positioning Model tracks a variety of indicators, including:
- Non-commercial net length as a percentage of total interest across various asset classes
- Year-over-year cash growth rate
- AAII bulls and bears %
- AAII bull-Bear spread
- AAII stock, bond, and cash allocations
- S&P 500 realized volatility
- S&P 500 price/NTM EPS ratio
Currently, the S&P 500 Price/NTM EPS multiple is in the 80th percentile of readings, a level dating back to the 1990s, often associated with bull market peaks.
However, this signal is not supported by other indicators like the AAII Stock, Bond, or Cash allocations.
This suggests that while the market appears overvalued based on the S&P 500 Price/NTM EPS multiple, it may become even more so as investors are forced to chase positive stock market returns by increasing their allocation to equities.
3. There Is A Rising Probability of A Soft Landing in The Economy
Over the past two quarters, many economic indicators have evolved in a manner that increases the probability of a soft landing.
Among these, the acceleration in Nonfarm Productivity stands out, rising to 2.4% on a YoY basis, which is roughly 50 basis points higher than the long-term trend.
This uptick in productivity growth lessens the pressure on corporations to cut labor costs through workforce reductions or offset these costs by raising consumer prices.
Furthermore, our corporate profitability model suggests we will likely avoid a deep earnings recession.
This reinforces our views that corporations will not need to resort to mass layoffs or above-trend price increases to protect profit margins.
That’s a wrap!
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Is It Time To Get Risky in Crypto?
Darius sat down with Paul Barron on the Paul Barron Network last week to discuss the “soft” vs. “hard” vs. “no” landing debate, Bitcoin ETF, earnings, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Near Textbook Disinflation in The Super Core PCE Deflator Suggests That The Fed May Safely Land The Inflation Plane At 2% In The Coming Quarters
The likelihood of a soft landing for the economy has increased, as highlighted by last week’s PCE report.
Notably, the 3-month annualized rate of inflation change stands at 2.1%, and the 6-month rate is at 1.9% – figures that align closely with the Federal Reserve’s target inflation rate of 2%.
These readings suggest that year-over-year inflation is set to decline towards 2% in the upcoming quarters.
This downward trend in inflation is reinforcing the soft landing scenario currently being priced into asset markets.
2. We Believe Upcoming Earnings Reports Will Outperform Recent Quarters
Signs of enhancement in corporate profitability are already evident.
Our Corporate Profitability model, which tracks the spread between Gross Domestic Income growth minus the spread between Unit Labor Cost and Productivity, shows that Corporate Profits bottomed a few quarters ago and have improved since.
According to the model, earnings are expected to continue improving.
Should this trend persist, it will act as a tailwind for asset markets.
3. The Impact of The Bitcoin ETF Will Take Time to Materialize
The approval of a Bitcoin ETF is likely to have a long-term positive impact on BTC, as it will introduce structural inflows into the asset class.
However, it is important to note that these benefits will not be fully captured immediately upon the ETF’s approval.
We believe that much of the anticipated impact is already factored into current prices, due to market participants front running the event.
That said, the ETF is not the sole influencer of Bitcoin’s price. Factors such as inflation, economic growth, policy changes, and liquidity also play crucial roles in determining Bitcoin price trends.
Investors aiming to stay informed about Bitcoin’s future trajectory should monitor these metrics closely.
That’s a wrap!
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What does the future hold for the US economy?
Darius sat down with Warren Pies on Pro to Pro Live last week to discuss the business cycle, fiscal stimulus, inflation, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. This Has Been An Income-Driven Business Cycle, Not A Credit-Driven Business Cycle… Focus on Income, Not Credit
The current business cycle has been driven by income growth rather than credit expansion.
This is significant because income-driven growth is typically seen as more sustainable than growth fueled by excessive borrowing.
Additionally, capital misallocation and adverse selection are common precursors to a recession.
Today’s economy is currently showing no meaningful signs of either.
Although a yield curve inversion has been a reliable indicator historically, we believe assuming that it guarantees a recession may be foolish.
2. Fiscal Stimulus Has Been A Major Contributing Factor to The Resiliency of Household Income… This dynamic Is Dissipating At The Margins
To get an idea of where fiscal policy is headed over the medium term, investors can observe:
- Individual income taxes, which comprise approximately 49% of the federal revenue, decreased by 15% YoY. This decrease contributed to extra cash on household balance sheets.
- The cost of living adjustment increased 8.7% in 2023 and is projected to be 3.2% in 2024.
- The year-over-year nominal delta in the federal budget deficit peaked at +$834 billion in June and decreased to +$320 billion in November. However, we believe it will remain positive, and fiscal stimulus will continue to support the economy, especially with a general election coming next year.
Although the direct impacts of fiscal stimulus on household income may be reducing, fiscal policy still leans towards supporting economic growth.
3. Textbook Core PCE And Super Core PCE Disinflation Are Supportive of Market Expectations For Rate Cuts Throughout 2024
The most recent Core PCE reading indicates an increase of 2.3% on a 3-month annualized rate of change basis and an increase of 2.5% on a 6-month annualized rate of change basis. That is positive.
The most recent Super Core PCE reading indicates an increase of 2.6% on a 3-month annualized rate of change basis and an increase of 3.0% on a 6-month annualized rate of change basis. That is also positive.
The recent softening in labor market conditions, specifically in terms of a reduction in labor demand indicated by total job openings and not total employment, is significant and suggests that the labor market is cooling without a considerable increase in unemployment.
The current economic environment is likely to continue as long as these trends in inflation measures and labor market conditions persist, along with the fiscal dynamics mentioned above.
We believe this environment will be one where moderate inflation, a balanced labor market, and supportive fiscal policies create a stable economic backdrop.
That’s a wrap!
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Did the Fed Just Take a Victory Lap?
Darius recently sat down with Maggie Lake on Real Vision‘s Daily Briefing to discuss the labor market, the Fed, corporate profits, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Labor Hoarding Has Spared The Business Cycle So Far… How Long Will It Persist?
In early 2022, the gap between labor demand and supply reached a peak of approximately 6 million.
Since then, it has steadily decreased to around 2.4 million – this is significant because it helps alleviate wage pressure in the labor market.
Additionally, for the first time in the time series, a significant divergence has emerged between the JOLTS Total Job Openings and the Household Survey Total Employment figures.
The slack in the labor market being created for almost two years now is coming from an abundance of job openings rather than a decrease in total employment.
This could pave the way to a soft landing, because the high number of unfilled jobs will likely reduce the upward pressure on wages, helping to moderate inflation without drastically increasing unemployment rates.
2. Surging Productivity Growth Is Supporting Rising Expectations of A Soft Landing
In late October, productivity growth came in at approximately 5% on a quarterly basis and 2% year-over-year, and these figures have since been revised upwards.
Corporate profits, which bottomed a few quarters ago, are now returning to more normalized levels.
This recovery in corporate profitability suggests that there is less pressure on corporations to reduce labor costs or to pass on price increases to customers, supporting the expectations of a soft landing.
3. Investing Is Not About Predicting Outcomes. It Is About Being Positioned to Take Advantage of What Happens In Asset Markets.
The Federal Reserve is aware that the effects of monetary policy are subject to long and variable longs.
As a result of the positive inflation, labor market, and productivity outcomes we have seen, we believe the Fed recognizes there is no need for further tightening.
Returning to 2% inflation without disrupting the labor market would be a highly favorable outcome – especially in a general election year that features an incumbent president.
However, as an investor, it should not matter whether the economy “soft”, “hard”, or “no” lands.
Instead, what is important is the trajectory that asset markets take to the ultimate outcome, and being positioned accordingly.
Over the past six weeks, 42 Macro clients have made a ton of money being positioned for, first, the pain trade higher in stocks and bonds, and, second, the eventual market regime transition to GOLDILOCKS. Our models will signal in real-time when it’s time to book these “soft landing” trades and begin betting on either the “hard” or “no” landing scenario.
That’s a wrap!
If you found this blog post helpful:
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How Should Bitcoin Fit Into A Traditional Portfolio?
Darius sat down with Anthony Pompliano last week to discuss our KISS Portfolio Construction Process, the outlook on interest rates, Bitcoin, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. We Believe Investors Should Keep Their Investment Process Simple And Systematic… And It Should Include Bitcoin
In January, we made a strategic shift to our investment approach to our KISS portfolio construction process, transitioning to a long-only strategy.
The new process is designed to help traditional investors, RIAs, family offices, and other money managers outperform the conventional 60/40 portfolio in the long run by integrating trend-following strategies and a consistent allocation to Bitcoin.
The portfolio follows a 60/30/10 allocation, comprising 60% SPY, 30% AGG, and 10% BITO.
For serious investors considering adding a Bitcoin allocation, we emphasize the importance of systematic risk management to navigate this process and achieve smoother returns.
2. There Is A Significant Amount of Policy Rate Easing Priced Into 2024
The market is currently pricing in a 90+ percent chance of a rate cut by the end of Q2 2024.
This expectation is reflected both in overnight index swaps and federal funds futures, where a considerable amount of policy rate easing is priced throughout next year.
Moreover, we believe the concurrent rise in both stocks and bonds is fueling expectations of a disinflationary ‘soft landing’ in the months ahead.
3. Our Models Indicate Only A Low-To-Middling Probability Of A Near-Term Recession In the US Economy
At 42 Macro, we monitor several key indicators that give our clients the ability to spot a developing recession in real-time.
One of these indicators has crossed its recession-signaling threshold, suggesting a low-to-middling probability of a near-term recession.
However, it is important for investors to maintain perspective.
Our research indicates that stock markets typically peak around the same time as a breakout in jobless claims and the unemployment rate. Our research also indicates the stock market is typically very buoyant in the months leading up to that peak.
Therefore, there is no urgency for investors to put on a recession trade prematurely at this juncture.
That’s a wrap!
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Will Santa Claus Bring Gifts For Investors This Year?
Darius appeared on Schwab Network last week to discuss the US economy, the probability of a recession, the US consumer, and more.
If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets:
Both Technicals and Economic Data Suggest The Market Should Continue to Rally Well Into January
- The conditional seasonality research we conduct at 42 Macro suggests the dip will likely be bought until late January.
- This sentiment aligns with the recent economic data, which confirms the market’s consensus for a soft landing. We believe the market has fundamental reasons to continue rallying.
- We believe that the Federal Reserve has completed its rate-hiking cycle. While we think that market expectations might be slightly ahead of themselves regarding when the Fed will begin cutting rates, we do not foresee this having significant negative implications for the stock and bond markets at the current juncture.
That’s a wrap!
If you found this blog post helpful:
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2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!