All Things Macro

Darius recently sat down with Nick Halaris to discuss proper risk management, the labor market, inflation, asset markets, and much more.

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

1. Investors Are Doing A Great Disservice To Themselves By Not Being Bayesian

At 42 Macro, we use three core tenants to form our systematic macro risk management process:

• Regime Segmentation: We identify which investable regime the economy is in, the probability of that regime persisting, and how long it is likely to persist.
• Bayesian Inference: We systematically update the probability of relevant economic scenarios as new information becomes available to the market.
• Risk Management Tools: We use sophisticated quantitative tools like our Volatility Adjusted Momentum Signal (VAMS) and Global Macro Risk Matrix to predict when the price momentum of a particular security or overall market regime (risk on vs. risk off) is likely to change. 

We urge our readers to infuse proper risk management in their investment strategies. We welcome you to use our tools if you want to gain a systematic edge in the market: https://42macro.com/sampleresearch.

2. Labor Hoarding Has Contributed To The Resilience Of The US Economy

The most recent US Total Labor Force SA reading was 167 million people – a value below its trendline since 2009. 

Conversely, Gross Domestic Income recovered its trendline approximately 18 months ago and remains above it. 

The discrepancy in strength between the two indicators suggests there is a large amount of cash in the economy that can be used to demand goods and services but insufficient labor to supply those goods and services.

3. History Tells Us The Fed Must Break The Economy to Achieve Its Price Stability Mandate

We analyzed every recession since 1969 and found that, on a median basis, core PCE inflation is almost always flat-to-up in the year leading up to a recession.

Historically, inflation does not break down without a recession.

Both this study and our HOPE+I framework confirm that inflation is a lagging indicator, and we believe it will again fail to fall below the Fed’s 2% target without a recession.

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!

Evidence Of A Potential Wage-Price Spiral

The ~150,000 member United Auto Workers (UAW) union has declared “war” on Detroit’s big three auto makers GM $GM, Ford $F, and Stellantis $STLAM IM, threatening a strike by September 15 if the companies fail to acquiesce to demands that include a +46% wage increase and a decline in the work week to 32 hours. If a new collective bargaining agreement cannot be achieved by the deadline, the strike will be joined by Unifor — Canada’s largest labor union with ~315,000 total workers and ~18,000 auto workers.

Stories like this are supportive of our view that the narrative around inflation is likely to shift from “immaculate disinflation” to “sticky inflation” within 3-6 months. We have been keen to call out the elevated probability of a soft landing in the US economy. While a soft landing is not our modal outcome, we believe it is a scenario worth educating you on because a soft landing in the economy is highly likely to result in a soft landing in inflation relative to the Fed’s 2% target — which Powell went out of his way to quadruple down on last Friday at Jackson Hole.

No firm on global Wall Street has had a more accurate view on the resiliency of the US economy than @42Macro has for the past year and, as a result, a better call on bonds. We still see more fixed income volatility in the months ahead because we believe the consensus narrative surrounding inflation is likely to deteriorate before the recession hits.

What is Making the U.S. Economy so Resilient?

This week, Darius sat down with Maggie Lake from Real Vision to discuss the resiliency of the US economy, the housing market, and much more.

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

1. The Resiliency of the US Economy Will Likely Continue 

Our research shows the US economy has nowcast itself into “GOLDILOCKS” for the past five months. GOLDILOCKS is a regime marked by growth trending higher and inflation trending lower.

The strength of the economy will likely continue because:

• Goods demand is increasing — real goods PCE increased 5.4% on a three-month annualized basis in the most recent month.
• Corporations have been reducing inventories for the past five quarters, reducing 72 basis points off of GDP per quarter, on average. This, paired with increasing demand, could lead to inventory restocking the next few quarters.

2. New Home Sales Are Surging Because The Existing Home Sales Market Has Been Starved of Supply

Today, homeowners are unwilling to sell their homes and trade their ~3.5% mortgage (the effective mortgage rate nationally) for the current market rate of ~7%.

This supply shortage is causing a spike in new home builds:

• Building Permits are growing at 7% on a three-month annualized basis.
• Housing Starts are growing 31% on a three-month annualized rate of change basis.
• New Home Sales are growing at 21% on a three-month annualized basis.

3. “Bidenomics” Is Also Contributing to Our “Resilient US Economy” Theme

The US economy is experiencing a record non-war, non-recession budget deficit under the current administration.

Last year, the deficit was -3.7% of GDP. 

Today, it is -8.4%.

That 470 basis point difference equates to approximately $1.3 trillion of incremental fiscal stimulus supplied to the US economy, further contributing to its resiliency. 

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:

• the Headline Index rose to the highest since Sep-22
• Capex Plans rose to the highest since Jan-22
• Inventory Accumulation rose to the highest since Oct-22
• Sales Expectations rose to a 5mo high
• Hiring Plans rose to a 2mo high
• Few or No Qualified Applicant for Job Openings rose to the highest since Sep-22

On the inflation front:

• the Higher Prices Index fell to the lowest since Jan-21
• Price Plans Next 3mos fell to a 3mo low
• Compensation Plans fell to the lowest since Apr-21

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 respect to the Continuing Claims/Total Labor Force Ratio, the 3mo annualized growth rate for July decelerated to -24.6%, well shy of the median rate observed at the start of recessions throughout the history of the time series.
• With respect to Cyclical Unemployment, the 3mo annualized growth rate for July accelerated to -3.3%, well shy of the median rate observed at the start of recessions throughout the history of the time series.
• With respect to the Temporary Employment, the 3mo annualized growth rate for July decelerated to -6.5%, narrowly shy of the median rate observed at the start of recessions throughout the history of the time series and is the only one of our “Fab 5” Recession Signaling Indicators suggesting the US economy is currently in a recession.

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.

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:

• Core PCE, the Fed’s preferred measure of inflation, decelerated to 3.3% on a three-month annualized basis, the lowest print since February 2021.
• Super Core PCE  decelerated to 3.2% on a three-month annualized basis, the lowest print since July 2022.
• Median PCE decelerated to 3.8% on a three-month annualized basis, the lowest print since August 2021.
• Trim Mean PCE decelerated to 3.4% on a three-month annualized basis,  the lowest print since August 2021.

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:

• Durable Goods New Orders accelerated to +32% on a 3-month annualized basis (highest since Sep-20)
• Core Capital Goods New Orders accelerated to 5.7% on a 3-month annualized basis (highest since Aug-22)
• Jobless Claims surprised to the downside, supporting the “Transitory Goldilocks” theme
• Real Personal Consumption Expenditures accelerated to +2.9% on a 3-month annualized basis (highest since Mar-23)
• Nominal Employee Compensation accelerated to 6.2% on a 3-month annualized basis (highest since Sep-22)

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:

• Near-record cash on household balance sheets
• Near-record cash on corporate balance sheets
• Private sector income and wealth have outpaced inflation on a structural basis
• Limited credit cycle vulnerabilities
• Limited exposure to the volatile manufacturing sector
• Longer, long and variable lags
• Bidenomics
• Labor hoarding

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!

Is the Fed Done Hiking?

Earlier this week, Darius joined Maggie Lake and Andreas Steno on Real Vision to discuss the Fed, Inflation, and more.
If you missed the interview, we have you covered. Here are three key insights that will save your portfolio:

1) We Believe The Narrative Surrounding Inflation Will Change In 3-6 Months

The interplay between immaculate disinflation and rising soft landing expectations has been the driver behind asset markets this year.

We believe any potential shifts in this narrative are not being adequately priced into market forecasts.

Reviewing several key inflation measures—median CPI, trim mean CPI, median PCE deflator, trim mean PCE, core PCE, and super core PCE—highlights a concerning trend. Sequential trends, especially for median CPI and trim mean CPI, indicate stagnation between 3% to 4%. If this lack of progress continues, it could be problematic for the economy.

Our models indicate that a recession in the US economy is unlikely to begin until Q4 this year or Q1 next year, with the depths of the recession probably not hitting until the second or third quarter of next year.

2) The Rate of Change of Inflation Is Important, Not the Level

Investors should be concerned with inflation’s direction and velocity – not the current level. 

Why? Because the rate of change is what markets react to. While the Federal Reserve may concern itself with the actual level of inflation, investors should strive to be one step ahead of the Fed, analyzing shifts in the direction and speed of travel.

3) A Soft Landing In Growth = A Soft Landing In Inflation

Inflationary impulses in the economy take time to permeate fully – this explains why the BLS and BEA measure inflation as they do. 

Inflation has subsided back to around 2% when you exclude the lagging housing components of inflation. 

Notably, core services ex-housing CPI and the core services ex-housing PCE deflator are showing three-month annualized rates of 1.4% and 3.2%, respectively. 

If we do have a soft landing, it will likely be at some point in 1H24 — a scenario that, while not the most probable, is far more likely than a near-term recession. 

Under these conditions, we believe we would see metrics like super core CPI, super core PCE, and core PCE firm up and begin accelerating again.

That’s a wrap! 

If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!