Darius recently sat down with our friend David Lin, where they discussed the drivers behind current market positioning, the Fourth Turning, its impact on asset markets, and more.

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

1. What Has Caused The Current Market Positioning?

In our view, current market positioning has been driven by three main themes:

  1. Resilient U.S. Economy: Since authoring the theme in September 2022, we have seen ongoing upside surprises in U.S. growth. We believe this resilience has contributed to the current crowded long positioning in risk assets.
  2. Here Comes The Liquidity: We anticipate a significant acceleration in both U.S. and global liquidity over the medium term.
  3. Jay Wants A Soft Landing: We have maintained this theme since last November, which revolves around the Federal Reserve’s asymmetrically dovish reaction function. When the Fed leans dovish and the economy is not in or heading into recession, it is often a bullish signal for investors.

2. How Will The Fourth Turning Affect Income Inequality? 

At 42 Macro, we conducted an in-depth statistical study on Fourth Turnings, focusing on the economic implications and policy shifts, as well as their impact on asset markets.

In our empirical study, we found that income inequality, measured by the top 10% share of national income, declined sharply throughout previous Fourth Turnings.

We are currently at a very high level of income inequality, and we expect a significant decline throughout this Fourth Turning – but not without great cost. We anticipate policy trends to become increasingly populist, essentially redistributing wealth from the rich to the poor. This shift may not occur immediately, especially given the current divided government, but it may be a response to a larger crisis that both households and investors will need to navigate.

3. How Will Asset Markets Perform During The Fourth Turning?

Anticipating how asset markets will perform during the Fourth Turning involves understanding how policymakers typically respond to these geopolitical, economic, and social developments. Historically, they have used two main strategies:

  • Fiscal Support: There is usually significant fiscal policy support for the economy, which boosts nominal GDP and tends to be favorable for risk assets, such as stocks, credit, crypto, and commodities.
  • Monetary Debasement and Financial Repression: The Federal Reserve has historically engaged in monetary debasement and financial repression during Fourth Turnings, effectively lowering the value of money to support fiscal measures. 

Combining these factors—excessive fiscal policy, monetary debasement, and currency devaluation—leads us at 42 Macro to maintain a structurally bullish stance on risk assets throughout the Fourth Turning, including stocks, credit, crypto, and commodities, while remaining structurally bearish on defensive assets like Treasury bonds and the U.S. dollar.

That does not mean that risk assets will appreciate in a straight line. There will be significant drawdowns to risk manage along the way – perhaps as painful as the Dot Com Bust, GFC, or COVID crash. Fortuitously, 42 Macro clients have access to our KISS Portfolio Construction Process and Discretionary Risk Management Overlay, aka “Dr. Mo”, to help them successfully navigate their portfolios throughout these increasingly trying geopolitical times. 

By now, you’ve likely realized that piecing together an investment strategy from finance podcasts, YouTube videos, and macro “gurus” on 𝕏 is not delivering the results you know you deserve. 

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

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