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Will Rate Cuts Come in 2024?

Darius sat down with Maggie Lake on Real Vision’s Daily Briefing this week to discuss asset markets, productivity growth, Immaculate Disinflation, and more. 

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

1. A Tug-of-War Has Emerged Between The No-Landing And Soft-Landing Scenarios

Asset markets have pivoted to a soft-landing as consensus since late October, driven by positive surprises in growth, global liquidity, and productivity, as well as favorable treasury net issuance policy.

At the current juncture, the probability of a soft-landing scenario is in the process of peaking, and the no-landing scenario is gaining share.

The no-landing scenario is not yet the modal outcome, however. The February ISM Services Report provided insight into various metrics, including the Headline ISM Services PMI, Prices, New Orders, Employment, Number of Industries Reporting Growth, and Supplier Delivery Times. Collectively, these metrics supported the soft-landing scenario at the expense of the no-landing scenario.

2. Above-Trend Productivity Growth Will Likely Be Sustained For The Next Few Quarters

The recent surge in AI, coupled with decreased employee turnover rates and the thawing of global supply chains between the manufacturing and services sectors, has collectively fueled above-trend productivity growth. 

We anticipate that this momentum in productivity is likely to be sustained over the medium term.

This is important for investors because higher productivity puts less pressure on corporate margins, reducing the need for corporations to shed costs and/or pass on price increases to consumers.

3. Immaculate Disinflation Is Likely to Dissipate In The Second Half of This Year

Immaculate Disinflation persists.

Despite the two hot inflation prints from last month’s CPI and PCE Deflator reports, the Fed recognizes that a single month’s data does not establish a trend. They prefer to see sustained patterns over multiple months before considering a policy shift. 

That said, we believe that the “Immaculate Disinflation” narrative is likely to come to an end in the second half of this year.

That’s a wrap! 

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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!

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!

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! 

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!

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 

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 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! 

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 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:

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! 

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!

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:

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!

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:

If the labor market remains stable, consumers should continue to fare well.

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!