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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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!
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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:
- Real PCE growth slowed to 2.1% on a 3-month annualized basis, a figure slightly below trend pace
- Good consumption decreased to a below-trend 1.9% on a three-month annualized basis
- Services consumption decreased to an at-trend 2.1% on a three-month annualized basis
- Real personal income increased slightly to a below-trend 1.2% on a three-month annualized basis
If the labor market remains stable, consumers should continue to fare well.
That’s a wrap!
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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!
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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!
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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:
- Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
- RT this thread and follow @DariusDale42 and @42Macro.
- Have a great day!