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A Crude Reality for Stocks?

Darius recently sat down with Maggie Lake to discuss the energy sector, the labor market, the resiliency of the U.S. economy, and more.

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

1. The 42 Macro Weather Model Suggests Investors Should Be Operating With Average-to-Below Average Position Sizes Across All Asset Classes Except Cash

Our 42 Macro Weather Model projects the three-month outlook for stocks, bonds, the dollar, commodities, and Bitcoin by analyzing specific indicators within the following ten components of macro:

Currently, the Weather Model indicates a neutral three-month outlook for stocks and bonds and a bearish three-month outlook for the dollar, commodities, and Bitcoin. 

Our daily systematic scoring of key fundamental and technical indicators suggest this is not a great time to be taking a lot of risk in financial markets.

2. The August Jobs Report Will Likely Perpetuate Additional Right-Tail Risk In The US Equity Market Specifically

In the August jobs report:

In its current “Goldilocks” state, the labor market is too hot to spark further tightening from the Fed but too cold to raise recession fears. 

We can persist in this state for several months, which may create additional right-tail risk in the equity market as underperforming professional investors stare down career risk heading into yearend.

3. Near Record Cash on Household Balance Sheets Is Supporting The Resiliency of The US Economy

Our Cash on Household Balance Sheets calculation tracks the Federal Reserve, flow of funds, checkable deposits, and money market fund exposure for both the household and corporate sectors.

The household sector maintains 3% of total assets, or $4.5 trillion, in checkable deposits – approximately $3 trillion more than its pre-COVID values.

The corporate sector checkable deposits also sit around 3% of total assets as well. 

Including money market fund exposure, we are currently witnessing the highest levels of cash on the private sector balance sheet as a % of total assets since the 1950s.

That’s a wrap! 

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Turbulent Markets Ahead?

Last week, Darius sat down with Paul Barron to discuss global bond markets, #inflation, #bitcoin, and more.

If you missed the interview, we have you covered. Here are three takeaways from the conversation that every investor needs to see: 

1. Volatility Has Returned to Global Bond Markets

Over the past month, there has been a striking shift in bond market volatility:

Incremental confirmation of the economic resiliency in the US and Japan and the resiliency of inflation in the Eurozone and the UK have been the driving factors of this uptick in bond market volatility.

2. The Resiliency of The US Economy Will Likely Cause Inflation to Persist

Since last fall, inflation has declined in an “immaculate” way; historically, inflation has only broken down two to three quarters after recessions begin.

But the US economy is not in recession – in fact, it is booming in some respects. The latest estimate for Q3 GDP per the Atlanta Fed’s GDPNow model is a whopping 5.8%.

The strong US economy will likely cause inflation to stabilize at levels higher than the Fed’s price stability mandate.

Within the next 3-6 months, we expect the narrative to pivot from ‘immaculate disinflation’ to ‘sticky inflation.’ 

3. The Path to Bitcoin’s Next Bull Market Will Likely Remain Volatile

Historically, Bitcoin experiences several 20 to 40% corrections in the years leading up to halvings. We experienced an 18% correction over the past ~month – something we have warned our audience about since April. 

We foresee two major tailwinds for Bitcoin in the next year:

We believe these two tailwinds will push Bitcoin north of $100,000 by December 2024, but the path to get there will continue to be rocky and likely back-end loaded. 

That’s a wrap! 

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  1. Go to www.42macro.com to unlock actionable, hedge-fund caliber investment insights.
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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! 

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!

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!