Is Wall Street Calling The Fed’s Bluff?

Earlier this week, Darius joined Anthony Pompliano to discuss Manufacturing, the U.S. Consumer, Bitcoin, and more.

Miss the discussion? No problem. Here are the three most important insights that can help your portfolio:

1) Healthy Balance Sheets And A Robust Labor Market Are Contributing to a Resilient U.S. Consumer

Since August of 2022, we have consistently maintained the view that the U.S. economy would remain robust, despite recession fears.

June’s retail sales reported a 4.6% increase on a three-month annualized basis and the highest print we have seen in four months – further proof of the resilience of the consumer we have consistently called for.

Additionally, a significant driver of the increase in retail sales, auto sales, accelerated by a striking 23% on a three-month annualized basis.

Two key contributors to this consumer resilience have been healthy consumer balance sheets and a strong labor market.

2) Leading Manufacturing Indicators Point to Near-Term Bottom in the Inventory Cycle

The ISM Manufacturing PMI, the most widely used leading indicator for the broader US manufacturing cycle, recently dropped to 46.0 in June – a new cycle low.

However, the spread between the ISM Manufacturing New Orders PMI and ISM Manufacturing Inventories, which is a leading indicator of the headline index, suggests a bounce in the ISM Manufacturing PMI in the coming months.

A recovery in the inventory cycle would add additional support to the soft landing narrative and incrementally contribute to the epic short squeeze in US equities that we have and continue to call for.

3) S&P 500 and Bitcoin Correlations:

As part of our 42 Macro research, we conduct a multi-factor correlation study, tracking the S&P 500 and Bitcoin in relation to various macro factors.

Recently, the primary driver of the S&P’s performance has been cyclical growth expectations.

Bitcoin, however, is being driven by structural growth expectations, but inversely, and is rallying on potential recession prospects, which would pressure the Fed and other central banks to provide the market with ample liquidity.

Although most investors bundle risk assets into one broader bucket, the reality is that there is often a divergence between what drives different asset markets.

We believe the Fed will begin providing liquidity to the market by the spring of next year, creating a positive environment for risk assets into and through the end of 2024.

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!

Macro Outlook

Darius joined Benjamin Cowen from Into The Cryptoverse earlier this week to discuss Inflation, the Labor, Liquidity, and more.

If you missed the interview, we have you covered. Here are three key insights that are important for your portfolio:

1) Despite The Recent Dovish Print on Inflation, We Believe The Fed Will Hike At The July Meeting

The money markets are currently pricing in approximately an 80% probability that the Federal Reserve will hike at their next meeting.

Generally, the Fed tends to move in sync with asset markets, acting according to what the market has priced in.

However, the Fed’s decisions are not purely inflation-oriented; they take into account labor market conditions as well.

Given these indicators, we believe the Fed will likely push through with the rate hike come July’s meeting.

2) Labor Hoarding Is Contributing to The Resiliency of The U.S. Economy

While the US Total Labor Force SA is trailing behind the pre-pandemic 2009-2019 trend, we have seen the Gross Domestic Income regain the trend shortly after the pandemic concluded.

This disparity tells us that there is an abundance of money in the economy but an inadequate labor force to meet the demand for goods and services.

Additionally, since March 2020, we have experienced labor demand outpace supply, with a staggering 3.9 million more in demand compared to available labor.

This excess demand for labor is causing labor hoarding, further strengthening the resilience of the U.S. economy.

3) We Are In A Liquidity Cycle Upturn; The Global Liquidity Cycle Bottomed In Fall of Last Year

Our 42 Macro Global Liquidity proxy, a sum of global central bank balance sheets, global broad money supply, and global FX reserves minus gold, shows a declining trend in recent months.

However, we believe the liquidity cycle bottomed last fall, and we are currently in the midst of a likely 2.5-year upswing.

Although we may see some turbulence over the next few quarters, Bitcoin, in this environment, could perform exceptionally well, pushing it above the $100,000 level by the end of next year.

In between now and then, we still anticipate a recession will commence in the US economy in the next two to three quarters, likely causing risk assets to fall as the Phase 2 credit cycle downturn sets in – a scenario that we believe has not been priced into the market yet.

We continue to believe risk assets will squeeze higher and peak in Q4 or Q1 of next year.

#respectthexaxis

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

Is It Time to Go Risk On?

Is It Time to Go Risk On?

Last week, Darius joined @maggielake from @realvision to discuss #Inflation, the U.S. Consumer, and more.

In case you missed it, here are three takeaways from the interview that are important for your portfolio:

1) Consumer Confidence Is Increasing, And The Consumer Economy Is Resilient 

With the University of Michigan Consumer Sentiment Index ticking up by a substantial 8.2 points to 72.6 this month, we are seeing the highest level of consumer confidence since September 2021. 

This noteworthy monthly increase represents the most rapid rise since the winter of 2005. 

The main contributor to this surge in confidence and the ongoing resilience of the consumer economy has been immaculate disinflation.

2) Immaculate Disinflation Has Caused Consumers to Believe Prices Will Continue to Decline Over The Next Year

The recent period of immaculate disinflation is leading consumers to anticipate a continued decrease in prices over the year ahead. 

Despite a slight uptick in the UMich Expected Changes in Prices Index to 3.4, it is significantly down from the 5.5 level a year ago. 

This deflationary anticipation is boosting consumers’ expectations of their financial situation, with the UMich Expected Change in Financial Situation in a Year data recording an eight percent month-over-month increase – the highest since July 2021. 

Essentially, immaculate disinflation is bolstering consumer incomes, both real and expected.

3) The US Economy Has Been Resilient

This resilience can be attributed to a variety of factors, including: 

• near record levels of cash in household and corporate balance sheets
• Limited private sector credit cycle vulnerabilities due to tepid credit growth prior to tightening and a low share of floating-rate debt 
• minimal exposure to the volatile manufacturing sector
• labor hoarding, and 
• the effects of Bidenomics

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!

What’s Propping Up The US Consumer?

Last week, Darius joined Maggie Lake from Real Vision to discuss Rate Hikes, Inflation, the Stock Market, and more.

In case you missed it, here are five takeaways from the interview every investor needs to know: 

1) The Market Believes The Fed Is Done Hiking. We Are Fading That View. 

Currently, money markets are pricing in the assumption that future inflation data will force the Fed to pause at their July meeting.

Moreover, money markets are pricing in twice as much easing over the next two years by the Fed as they are the ECB (Fed: ~200 basis points; ECB: ~100 basis points) 

We believe this is unlikely because 1) the European economy is already in recession, and 2) the European inflation cycle tends to lag the US by two quarters; as a result, they are heading into the most disinflationary part of their Inflation Cycle in 2H23. 

While it may not occur in July due to a likely dovish June CPI release, we expect the Fed to continue to raise rates in the coming months. 

Consequently, we foresee the dollar grinding higher over the medium term. 

2) We Expect A Series of Upside Inflation Surprises Throughout 2023

Throughout the year, erroneous forecasts have caused investor consensus to roll forward the recession starting point; now, consensus estimates call for the recession to begin in Q3. 

However, inflation tends to break down 6-8 months after the recession starts – it is the most lagging indicator of the US Business Cycle. 

As a result, we believe we will not see any further significant disinflation after the June CPI release without a substantial drawdown in the labor market.

3) A Variety of Factors Are Propping Up The Consumer

We are seeing a wide range of conditions still propping up the US consumer:

• Unemployment is still low; the booming US labor market has allowed consumers to continue spending
• Cash on household and corporate balance sheets is high, currently at 3% of total assets. The last time that ratio was that high was in the 1960s 
• Manufacturing as a % of GDP has declined substantially in recent decades. That is important because manufacturing tends to account for 98% of total job loss during recessions. Now only 18% of GDP, this more volatile sector of the economy is a much smaller percentage of total employment too at only 14%. 
• Housing is resilient; despite the interest rate increases, outstanding mortgage rate debt is still at 3%. There is a standstill in existing home sales because consumers will not trade lower mortgage rates for the higher current rates – this has increased demand for new homes, thus holding up the housing market.

4) The Phase 2 Credit Cycle Downturn Is Ahead of Us

We believe the recession is still ahead of us.

Since the Great Depression, EVERY recession has had a market crash associated with it as we price in the downturn in the credit cycle. 

In addition, on a median basis, markets tend to peak a month before the lowest point in the unemployment rate. 

So, we typically see degradation in the labor market and a dip in the stock market simultaneously. 

That means investors who share our longer-term (6-12mos) bearish outlook for the stock market must avoid expressing that view with actual trades until we are much closer to the start of recession. Since last fall, we have identified 4Q23 as the quarter with the highest probability of seeing a recession commence in the US economy. The second highest probability is 1Q24. 

5) The Stock Market Is Likely Nearing A Local Top 

This stock market rally has caught many investors off-guard; most fund managers are hastily rushing to minimize their YTD underperformance.

As a result, the rally can largely be explained by investors chasing the market higher, further squeezing Bears. 

Despite the recent uptrend, we advise against chasing stocks now.

We expect a correction in the near term for a variety of fundamental (e.g., declining US and global liquidity) and technical (e.g., the passage of a large, call-heavy OPEX should reverse flows) reasons. 

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!

Whose portfolios are at risk over the next six months? The bulls or the bears?

1) The Bond markets are pricing in significant Federal Reserve easing in the coming 12-18 months.

In addition, the Fed Funds futures show easing is likely to start as early as November of this year.

But, our view on liquidity and factors in the real economy show that market positioning should change over the medium term.

As a result, we expect to see an increase in bond market volatility over the next quarter or two before we get into a recession.

2) The US consumer has been resilient.

Real PCE, which measures the value of goods and services purchased by households in the US, adjusted for inflation, is growing at twice its pre-covid trend.

Real Income is also growing at a three-month annualized rate of 7.6%.

The uptick in real PCE and Income signals increased demand for goods and services. This increase in demand can lead to higher prices, causing inflation to persist. 

So, a resilient US consumer means sticky inflation.

3) The recession is likely to be delayed relative to investor consensus.

Many investors have been calling for a recession for over a year.

On top of that, many analysts are predicting negative GDP growth in the second quarter of the year.

But, our research shows the economy is resilient and will likely stay resilient until at least Q4.

And this delay could trap both bulls and bears, leading to significant volatility in both the stock and bond markets.

4) The AI bubble will eventually meet the wrong part of the Liquidity cycle.

The rise of AI is similar to the internet boom in the early 2000s. We could see a similar blow-off top in late-2023.

And while emerging technologies bring about significant societal changes, they don’t prevent market downturns. Investors would be wise to sell into strength later this year.

5) Is the bad news priced in? Are markets forward-looking?

We’ve backtested asset markets extensively and found that markets only look 2-3 months ahead at most.

Despite what people think, markets are more reactive than predictive.

And they’re most reactive to changing liquidity conditions. Since 2009, equity markets have been highly correlated to global liquidity.

Liquidity drives markets, and we believe the recovery in liquidity might not be as linear as many investors believe.

6) We expect a negative liquidity backdrop over the next few months.

We’ve probably seen a medium-term high in liquidity. 

The expected increase in the Treasury General Account and the return to net coupon issuance by the US Treasury are negative for liquidity. 

As a result, the Dollar could trend higher in the near term, harming #Bitcoin and other risk assets. 

That’s a wrap! 
If you found this article helpful, go to https://42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights.

Have a great day