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Asset Markets And Global Liquidity

Earlier this week, Darius sat down with Anthony Pompliano to discuss all things global liquidity.

If you missed the interview, we have you covered. Here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Private Sector Liquidity Is Driven By Currency Volatility And Interest Rate Volatility

There are two key drivers of private sector global liquidity:  

We track the US dollar and FX volatility via the USD REER and CVIX, respectively. Both of these measurements are inversely correlated to global liquidity.

Interest Rate Volatility is also a driver, where global liquidity usually lags behind movements in interest rates. Additionally, global liquidity typically follows bond market volatility, as measured by the MOVE Index. 

Much of global liquidity comes from the private sector. Generally, net international investment creditor economies like Europe, China, and Japan supply a large amount of liquidity from the private sector.

But risk aversion among those entities weighs on global liquidity in times of interest rate and currency volatility.

2. Global Liquidity Typically Lags Cyclical Movements In Growth And Inflation

Whereas currency volatility and interest rate volatility typically drive private sector liquidity, cyclical upturns and downturns in growth tend to drive public sector liquidity – meaningful slowdowns in growth generally result in increases in public sector liquidity and vice versa. 

Inflation also plays a key role in determining public sector liquidity trends, where meaningful cyclical upturns in inflation usually result in a decline in global liquidity and vice versa.

So, from a public sector perspective, central banks generally increase liquidity after slowdowns in both growth and inflation and remove liquidity after observing the opposite conditions.

3. Yes, The Liquidity Cycle Bottomed Last Fall, But Recovery Is Not Linear

Our 42 Macro Global Liquidity Proxy, the $ sum of global central bank balance sheets, global broad money supply, and global FX reserves minus gold, shows that we are in a liquidity cycle upturn and that October 2022 marked the bottom.

However, since April – when we explicitly told investors to book gains at ~$30k Bitcoin – we have been preaching that recovery is not linear like it usually has been in previous cycles. The global liquidity impulse has been negative ever since.

In recent months, the 3-month momentum impulse of global liquidity, we saw a $4 trillion decline in global liquidity in June and a $2.4 trillion decline in July. 

Although those readings do not indicate an environment beneficial for asset markets, they are improving at the margins.

All told, 2023 is a great reminder of something we have been preaching all year: liquidity is not the only driver of asset markets. Look no further than the divergence between Bitcoin and the S&P 500 over the past few months to understand this very important point. 

That’s a wrap! 

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China’s Structural Liquidity Trap Rears Its Ugly Head

The economic situation in China continues to be an unmitigated disaster, with the July Retail Sales, Industrial Production, and Fixed Assets Investment all slowing and missing consensus estimates.

Animal spirits in China are being weighed down by beleaguered private sector balance sheets. With respect to liabilities, China remains one of the most indebted major economies in the world. With respect to assets, China’s property market — the #2 asset for Chinese citizens behind bank deposits — has yet to recover from the beating it took from the 1-2 punch of “Zero COVID” and Emperor Xi’s “Three Red Lines” macroprudential policy.

All told, the Chinese economy is doing exactly what we thought it would do in the absence of large-scale fiscal stimulus — i.e., return to the structural liquidity trap it was mired in prior to COVID.

Macro Pro to Pro Live: Kris Sidial Recap

Earlier this week, Darius sat down with Kris Sidial from the Ambrus Group on 42 Macro’s Pro to Pro Live show to discuss reducing the cost of tail risk hedging strategies, investor positioning, #recession, and more.

Here are three takeaways from the conversation that have significant implications for your portfolio: 

1) If The Economy Does Not Enter Recession In The Next Quarter, US Corporations Will Be Underinvested And Understocked For A Soft-Landing

Over the past five quarters, 

If consumers continue to spend in line with recent trends (Real PCE on Goods increased 5.4% on a 3-month annualized basis in the most recent report), corporations will need to invest, kicking off a second wave of resilience in the economy.

We believe this second wave of the “Resilient US Economy” narrative will force more underpositioned investors to rotate off the sidelines and into stocks this fall.

2. Although We May See A Short Term Correction, Investor Positioning Implies More Right-Tail Risk In The Equity Market

The following positioning metrics are at levels consistent with local market tops:

Actual positioning in the futures and options market remains historically depressed.

As such, we believe a short-term correction could be the bear trap that leads to the final blow-off top in Q4 2023 or Q1 2024.

3) The Stock Market Typically Increases Leading Up to Recessions

Equities usually rally in the year leading up to recessions, returning a median of +16%, with an interquartile range of +14% to +20%.

They generate more than half of that return in the final three months leading up to a recession; blow-off tops in these late-cycle environments are the norm.

We expect the stock market will peak between October 1, 2023, and March 31, 2024, and we believe a crash will follow once market participants begin pricing in the Phase 2 Credit Cycle Downturn.

Until then, investors should continue riding the momentum wave higher.

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!

Fresh Evidence of Transitory GOLDILOCKS in the US Economy

The August University of Michigan Consumer Sentiment was marginally confirming of our “resilient US economy” theme.

Specifically, the Employment Survey – one of our “Fab 5” recession signaling indicators – ticked up to its highest level since Sep-22.

Additionally, the 1yr Forward Expected Change in Financial Situation Index ticked up to its highest level since Jul-21.

The August University of Michigan Consumer Sentiment was marginally confirming of the “immaculate disinflation” narrative as well. Specifically, the NTM and 5-10yr CPI forecast declined to their lowest respective levels since Mar-21 and Sep-22.

Correction or Crash?

One recent data point that gives us confidence we are not at the start of a market crash is the July NFIB Small Business Optimism Survey, which was released yesterday. The report had an undeniable GOLDILOCKS (growth UP; inflation DOWN) vibe to it.

On the growth front:

On the inflation front:

Still No Recession in Sight

From a recession-signaling perspective, we have been watching three statistics that are updated with each month’s Jobs Report: Continuing Claims/Total Labor Force Ratio, Cyclical Unemployment, and Temporary Employment.

With the Fed nearing the end of its rate-hiking scheme, asset markets likely require a recession for the current correction to develop into a crash.

New Headwinds for Asset Markets

Last week, Darius joined Nicole Petallides on the TD Ameritrade Network to discuss market headwinds, tailwinds, inflation, and more.

In case you missed it, here are three takeaways from the interview you need to know: 

1) Asset Markets Face Three New Headwinds That Arose Over The Past Few Weeks

We have seen a lot of recent volatility in asset markets as they digest three new headwinds that arose over the past couple of weeks:

2) We Believe The Existing Asset Market Tailwinds Will Push Stocks Higher Over The Next Quarter

In addition to the “Resilient US Economy” theme and the high likelihood that the immaculate disinflation trend will continue, two additional readings that came out last week contribute to our theory: 

Although a few of last week’s readings disprove the Transitory Goldilocks theme, specifically the ISM Services PMI coming in at 52.7, a 2-month low, and the ISM Services Prices PMI coming in at 56.8, a 3-month high, we believe the Transitory Goldilocks theme is likely to persist well into Q4.

3) The Return of Inflation Pressure Will Cause The “Risk On” Regime to Dissipate

The large amount of immaculate disinflation we have seen since Q4 of last year has been a key contributor to the Transitory Goldilocks theme and asset market performance.

Last week, we received incremental inflation data that supports further immaculate disinflation:

However, we expect the immaculate disinflation process will conclude within 3-6 months.

Any threat to the “immaculate disinflation” narrative threatens to unravel the “resilient US economy” narrative because market participants will start to come around to the view that the Fed needs to engineer a recession to achieve its price stability mandate. 

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!

The Most Important Number In Today’s Jobs Report

The spread between Labor Demand (Household Survey Employment + JOLTS) and Labor Supply (Total Labor Force) rose to 3.7mil in July from 3.6mil in June. This statically rare phenomenon of excess labor demand is the key reason wage growth remains robust amid trending “immaculate disinflation” and improving Nonfarm Productivity (3.7% QoQ SAAR in Q2; highest since 3Q20).

The US Economy Is Very Strong

Yesterday, Darius joined Anthony Pompliano to discuss Consumer Spending, Personal Income, Inflation, and more.

In case you missed it, here are the three most important takeaways from the interview: 

1. Consumer Spending Has Accelerated In Recent Months

Consumer spending, the total value of all goods and services purchased by households, makes up 68% of GDP.

Last week’s PCE report indicated that Real Personal Consumption Expenditures accelerated to 2.9% in June, primarily driven by a rebound in goods consumption – a three-month high.

In addition, Real Goods PCE accelerated to 5.4% on a three-month annualized basis, also a three-month high.

Both readings suggest US consumers remain incredibly resilient.  

2) Accelerating Income Growth Supports Our “Resilient US Economy” Theme

Even if individual real wages are declining, as we have seen recently, overall consumer income can still grow from increased employment, government support, and other income sources.

Nominal Employee Compensation, the broadest nominal measure of income published about the labor market every month, accelerated to 6.2% three-month annualized in June – the highest reading since September last year.

Additionally, Personal Interest Income, the income individuals receive from interest-bearing assets like savings accounts and bonds, accelerated to 8.8% three-month annualized basis in June. 

This figure is the highest number we have seen since January of this year and signals that consumers may have more disposable income to spend. 

3) The Inflation Fight Is Improving Significantly

Typically, inflation breaks down AFTER a recession. This year, we have seen the opposite – a term referred to as “immaculate disinflation”.

In Friday’s PCE report:

We expect the YoY inflation numbers to follow the low three-month annualized rates over the coming months, strengthening the immaculate disinflation narrative supporting 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 @42Macro and @42MacroWeather.
  3. Have a great day!

From Recession to Goldilocks

Over the weekend, Darius joined Andreas Steno Larsen on the Macro Sunday podcast to discuss the resiliency of the U.S. economy, Recession, and more.

In case you missed it, here are three takeaways from the interview you need to know: 

1. Despite Most Investors Calling For Recession, The US Economy Is Actually Accelerating

The Q2 GDP advance estimate report, released last week, indicates that GDP increased at a 2.4% annualized pace in the second quarter, surpassing the 2% estimate.

Further, the recent advance report on the latest Durable goods and CapEx data also supports our “Resilient US Economy” theme. Specifically, we saw:


Last week’s data suggests an accelerating economy; we urge bears out there to manage risk and #respectthexaxis regarding calls for a recession.

2. US Economic Resiliency Should Continue Into Q4 And Potentially Well Into Q1:

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

We expect the economy to remain strong well into Q4 of 2023 and possibly well into Q1 of 2024. By then, we believe the recession will commence. 

3. Investor Positioning Is Incongruent With the Rising Probability of a Soft Landing 

Our research tracking aggregated US equities positioning across the various equity instruments suggests that the market is currently net short approximately -7%.

That reading is in the 13th percentile of all historical readings in the time series since 1998, which suggests investors are deeply entrenched in the bearish narrative.

If there is going to be a soft landing in the economy – which we believe is a higher probability than a recession that starts in less than three months – investor positioning is currently and extremely under-positioned for it.

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 us on Twitter  @42Macro and @42MacroWeather.
  3. Have a great day!