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.
3. Have a great day!