Why Listening to The Market Beats Macro Predictions Every Time

Darius recently sat down with our friend Jason Shapiro from Crowded Market Report, where they discussed how to effectively use macro, the 42 Macro investment process, the outlook for China, 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 Is The Optimal Way to Incorporate Macro Into An Investment Strategy?

We would argue that many investors incorrectly incorporate macro into their investment strategy because they are not paying enough attention to what the market is signaling.

One of the most advanced tools we have developed for our clients is our Global Macro Matrix, which allows us to nowcast the current Market Regime and analyze what the market is signaling at any given moment. The tool also allows us to spot durable inflections in asset market momentum in real-time, thus providing 42 Macro clients the best chance to remain on the right side of market risk.

This insight is crucial because the Market Regime dictates dispersion within and across asset classes, ultimately shaping the returns we all experience as investors. By following what the market tells us, we can help our clients align their portfolios with what the market is actually trying to price in, not with what they hope it prices in. Note the difference.

2. What Proven Quantitative Techniques Influence The 42 Macro Process?

At 42 Macro, we stand on the shoulders of giants who came before us. Our research incorporates strategies that have stood the test of time on global Wall Street:

Regime Segmentation – Introduced by Ray Dalio in the 1970s
Bayesian Inference – Applied to Wall Street by Daniel Kahneman and Amos Tversky in the early 2000s
Volatility as a Leading Indicator for Price – Pioneered by Benoit Mandelbrot in the late 70s and early 80s

Our investment approach leverages these proven quantitative techniques, allowing us to deliver superior outcomes that meet our clients’ needs more effectively than alternative strategies.

3. What Is The Outlook For China?

We believe China is either in or sliding into a balance sheet recession, forcing Beijing to ease monetary and fiscal policy aggressively. Here are the three core factors behind this view:

Excessive Debt: Private non-financial sector debt in China stands at 205% of GDP—similar to Japan’s overly indebted level prior to its balance sheet recession, which remains the clearest example outside of the post-GFC U.S. economy.
Poor Capital Allocation: China’s investment-to-GDP ratio is 42%, far surpassing Japan’s peak before its real estate bubble burst. A similar bubble has plagued China for the past ~15 years.
Shrinking Labor Force: China’s old-age dependency ratio is rising faster than in most countries, leading to two critical challenges—a shrinking labor force and an aging population.

While we remain cautious about China’s long-term outlook due to these structural issues, we do expect positive returns from Chinese assets in response to ongoing policy support. However, we do not recommend staying indefinitely long.

Instead, we advise aligning your China exposure with our Discretionary Risk Management Overlay, aka “Dr. Mo,” which pivoted clients into a max position in China on September 17th. Since then, the FXI ETF—a proxy for Chinese stocks—has rallied about 24%, even factoring in the recent pullback. At some point, Dr. Mo will instruct 42 Macro clients to book gains in China. To date, it has not yet done so.

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?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass.

No catch, just macro insights to help you grow your portfolio—our way of saying thanks for being part of the 42 Macro universe.

Here Comes The Liquidity

Darius sat down with our friend Maria Bartiromo on Fox Business last week to discuss the probability of a soft landing, the outlook for global liquidity, China, and more.

If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:

We Believe A Soft Landing Is The Highest Probability Outcome Over The Next 12 Months

While the stock market fundamentals might disappoint over the medium term, we believe the key driver of asset markets will be rapid liquidity growth.
China is injecting an estimated $400 to $500 billion of liquidity over the next 6 to 12 months. Additionally, we expect around $700 billion in TGA spend-down during the first three to four months when the debt ceiling moratorium ends early next year. This anticipated surge in liquidity is not a force you want to bet against as an investor. If you are bearish, we suggest holding off on that view and revisiting it in Q2 of next year.
Credit debt is currently an issue, especially for small businesses and low-income consumers. However, the U.S. economy is a very K-shaped, top-heavy economy. If financial conditions remain easy, we believe wealthy consumers will continue spending.

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?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Threading The Macro Needle

Darius recently joined our friends Nadine Terman and Ben Brey, where they discussed the Market Regime outlook, our “Resilient US Economy” theme, #inflation, 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. Is A Transition to A Risk-Off Market Regime Likely Over The Medium Term?

A transition to a risk-off Market Regime is typically caused by one or more of three factors:

A sharp, unexpected, and prolonged deceleration in growth
A sharp, unexpected, and prolonged acceleration in inflation
A sharp and unexpected tightening of monetary and/or fiscal policy – usually both

In terms of our fundamental outlook, we do not believe any of these scenarios is highly probable in the medium term.

As a result, we believe the path of least resistance in risk assets is likely to remain higher until one or more of these factors comes to fruition.

2. What Is Upholding Our “Resilient US Economy” Theme?

We expect growth to remain resilient and surprise consensus expectations to the upside.

There are five pillars upholding that view:

A historically strong household sector balance sheet
The “West Village Montauk Effect”
A historically strong corporate sector balance sheet
Limited exposure to the policy rate
Limited exposure to the manufacturing sector

Additionally, there is little evidence of capital misallocation or adverse selection in the current business cycle. Specifically, the U.S. private non-financial sector’s debt-to-GDP ratio has been declining during this business cycle, indicating that economic growth is outpacing credit expansion.

3. What Is The Outlook For Inflation Over The Medium Term?

Our models indicate inflation is likely to bottom in 2H24.

However, as we head into Q1 of 2025 and beyond, our models diverge from consensus estimates and suggest inflation is likely to reaccelerate from the cyclical low observed in 2H24.

We believe there are three major factors that are likely to cause inflation to reaccelerate:

Easing base effects;
Inflation is the most lagging indicator of the business cycle and we do not anticipate a recession over a medium-term time horizon; and
Incrementally populist fiscal policy.

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?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

2025 Warning: Slowing Growth, Rising Inflation, and Productivity Could Squeeze Markets

Darius recently joined our friend Jeremy Szafron on Kitco News, where they discussed the recent decline in housing starts, the U.S. economy, inflation, 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 Does The Recent Housing Market Data Indicate About The Broader Economy?

Recent housing starts and building permit data, along with last week’s NAHB homebuyer market sentiment report, suggest an accelerated decline in the housing market, with housing starts and building permit data at levels not seen since summer 2020. This is concerning because the housing cycle has historically been a persistent leading indicator of the broader business cycle.

As a result, we anticipate growth will slow in the coming months. However, we do not advise investors to position for a developing recession in the U.S. economy.

Specifically, the latest retail sales and industrial production data, and other persistent leading indicators of the business cycle, currently indicate a recession is unlikely to materialize over a medium-term time horizon (3-12 months). Instead, we are currently observing a meandering off the top of the growth curve, which we believe is likely to persist over the next year or so.

2. How Is The U.S. Economy Transitioning From Its Growth Cycle Upturn?

The U.S. economy has been in a growth cycle upturn since the summer of 2022 when we authored our ‘Resilient U.S. Economy’ theme. We are now observing an economy that is merely getting less resilient.

Current data suggests a softening labor market, potentially at a faster rate than in recent quarters. However, our comprehensive analysis of leading indicators—including jobless claims, temporary employment, cyclical employment, layoffs, discharge rates, productivity, and corporate profit growth—does not indicate an impending severe downturn that would pose significant market risk.

While growth is likely to slow over the medium term, we do not anticipate the U.S. economy will decelerate as rapidly as the consensus currently expects. As a result, we believe the rate cuts presently priced into the 2025 forward rate curve in the U.S. are unlikely to materialize. A reconciliation is likely to occur near the year, but for now, we maintain a relatively optimistic outlook for asset markets – especially through year-end.

3. What Economic Challenges Might Emerge In 2025?

Our research suggests the inflation cycle will hit its low in the coming months before rising throughout 2025. This scenario implies growth potentially slowing to a below-trend pace in early 2025, with inflation bottoming at a level inconsistent with the Fed’s 2% target before reaccelerating.

Concurrently, we might observe a moderation or significant slowdown in productivity growth. The combination of slowing growth, rising inflation, and reduced productivity could lead to a margin squeeze and a significant slowdown in earnings. From a timing perspective, we view the first half of next year as the period with the most market risk.

Investors will likely need to reset their expectations for 2025 earnings lower during this time. However, we do not believe the markets need to debate this excessively at present because, historically, markets typically focus only on the next one to three months.

That’s a wrap!

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?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime, without penalty.

How Did Japan Break Bitcoin and Stocks?

Darius joined our friend Anthony Pompliano this week to discuss the JPY carry trade, the 42 Macro Weather Model, the 42 Macro GRID Model, 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 Caused The JPY Carry Trade?

The unwind of the JPY carry trade is gaining attention because many global financial institutions have used the low-yield Japanese yen to fund their leveraged positions.

Japanese yields have been significantly lower than those of other major central banks, making it cost-effective to borrow in yen and convert to USD, Euros, or other currencies for investments.

We are starting to see the beginning of that unwind now.

2. What Does Our Macro Weather Model Indicate About The Outlook For Asset Markets?

The 42 Macro Weather Model, which provides a short to medium-term outlook across the five major asset classes, is currently signaling a neutral outlook for the stock market and Bitcoin, suggesting baseline returns and volatility over the next three months.

Various fundamental factors, including an uptrend in global liquidity, projected rate cuts, and a projected decline in the unemployment rate, support this outlook.

However, we remain optimistic about the overall performance of these asset classes, as we don’t anticipate significant economic risks in the US that would force the Fed to cut rates more aggressively, which could otherwise hasten the unwinding of the yen carry trade.

3. What Does The 42 Macro GRID Model Indicate About The Outlook For Global Economies?

Our 42 Macro GRID Model indicates that the US economy is likely to enter a DEFLATION Bottom-Up Macro Regime in the third quarter, with both growth and inflation slowing. Despite this, we are not worried about asset markets. Our GDP growth estimates are significantly higher than consensus, and our deep dive into business cycle analysis suggests there is a limited risk of a recession in the US economy over the medium term.

Moreover, we believe inflation will likely bottom out in Q4 before rising in 2025. That could pose a future market risk, but isn’t an immediate concern at this time.

Global economies are largely diverging from the US, with most of the world likely to remain in a GOLDILOCKS Bottom-Up Macro Regime throughout 2H24, and the growth accelerating + inflation deceleration dynamic is a typically supportive backdrop for asset markets.

That’s a wrap!

If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.

Where Are Global Economies Headed?

Darius joined our friend Ben Brey on this month’s Pro to Pro Live to discuss China, the federal budget deficit, the “K-shaped” economy, 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. If Beijing Fails To Act Forcefully, China Will Slip Into A Structural Debt Deflation Akin to 1990’s Japan

China currently faces a difficult position. It has to balance its development goals against a high level of private sector debt, comparable to Japan’s before the 1990s.

Moreover, in 2011, China’s investment as a percentage of GDP peaked near 50%, roughly 1500 basis points higher than Japan’s peak before its long-term debt deflation.

China is caught between a rock and a hard place because it needs to both stimulate the economy to avoid a deflationary spiral and deal with the consequences of past capital misallocation from previous stimulus efforts. We believe the most likely outcome is that China will opt for more stimulus sooner rather than later to address these challenges.

2. The Fiscal Impulse Is Currently Negative, Which Is Likely To Contribute To The Pending Slowdown In Nominal Growth

As our 42 Macro Fiscal Policy Monitor demonstrates, we already see signs that the federal budget deficit is beginning to contract.

Despite being significantly larger in 2023 compared to 2022, the federal budget deficit is now $51 billion smaller on a year-to-date basis through May-24.

This shrinking deficit could lead to a stronger dollar, negatively impacting global liquidity by making it more expensive for other countries to borrow and service debt in dollars. This scenario may lead to a more significant global economic slowdown than the consensus estimates, which currently predict an average of 3% growth this year and next.

3. The US Economy Is A “K-shaped” Economy And That Dynamic Had Bullish Implications To Date

The US economy is currently “K-shaped,” where different segments of the population experience divergent recovery paths. We are observing higher-income individuals experience significant growth in consumption while those in lower-income brackets continue to struggle or worsen.

Our research shows that the lower part of the “K” has diminished in size, while the upper part, representing higher-income individuals, has grown larger. This is evident from consumer spending data, showing that the lower third of income earners accounts for only 15% of consumer spending, while the upper third accounts for 51%.

As long as stocks remain in a bull market and credit markets support private equity and private credit, the wealthier segment will continue to drive the economy. We believe this disparity is currently preventing a significant decline in corporate profits and a contraction in the business cycle.

That’s a wrap! If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.

How To Navigate The Fourth Turning

Darius hosted our friend Kris Sidial on this month’s Pro to Pro Live to discuss the 42 Macro Positioning Model, inflation, the Fourth Turning, 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. Our Positioning Model Suggests Vulnerability In Equities

Our 42 Macro Positioning Model monitors 14 indices relative to their historical time series. By identifying the thresholds of each indicator that correspond to major bull market peaks and troughs, we can determine whether we are approaching cyclical tops or bottoms in asset markets.

Currently, six of the seven indicators related to equities are flashing red. Specifically, the AAII stock allocation, AAII bond allocation, AAII cash allocation survey, S&P 500 realized volatility, S&P 500 implied volatility correlations, and the S&P 500’s valuation have all breached historical thresholds observed at bull market peaks.

The positioning cycle is not ever the cause of breakdowns and breakouts in stock market momentum, but it does act as an accelerant once a catalyst(s) has triggered. That means investors should be on higher alert than normal for signs of rapidly deteriorating fundamentals. A better process would be to trust proven risk management signals that will help you book gains closer to the top than waiting for or even attempting to [oft-erroneously] predict those catalysts.

2. Is 3% Inflation The New 2%?

At 42 Macro, we have conducted an in-depth analysis of the economic dynamics surrounding the Fourth Turning.

Our findings suggest that over the next decade, investors should anticipate significant upside surprises in the growth of public debt relative to current projections and a marked increase in inflation compared to the pre-Fourth Turning baseline.

This conclusion aligns with a report we published in January 2022 featuring our secular inflation model. Our analysis revealed that the Core PCE trend from 2010-2019 was 1.6%. However, our models project that the trend for 2020-2029 is likely to be between 2.6% and 3.0%.

3. A Higher Inflation Trend Will Have Important Implications For Investors’ Portfolios

The inflation outlook during the Fourth Turning has significant implications for the stock-bond correlation and investors’ portfolios.

In periods of 1-2% Headline CPI, as experienced over the past decade, the stock-bond correlation tends to be negative. Conversely, in periods of 2-3% Headline CPI, the correlation becomes positive, and increasingly positive beyond those levels.

If our Fourth Turning thesis holds true, a traditional 60/40 portfolio is likely to underperform more thoughtful asset allocation strategies over the next decade. Investors will need to consider alternative instruments, such as volatility products, to hedge their portfolios effectively. Investors should consider the 42 Macro KISS Model Portfolio, which is already being relied upon to deliver superior investment performance for thousands of investors around the world.

That’s a wrap!

If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.

How Do Retail and Institutional Investors Differ?

Darius recently hosted our May 2024 Pro to Pro Live to discuss the current Market Regime, the US consumer, key differences between retail and institutional investors, 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. Investors Should Position According To The Current Market Regime

Our 42 Macro Risk Management Process transforms complex market dynamics into a clear and straightforward three-step approach:

Position for the Market Regime
Prepare for regime change using quantitative signals with our Macro Weather Model
Prepare for regime change using qualitative signals via our fundamental research

We have remained in a REFLATION Market Regime since March. However, our quantitative and qualitative risk management processes indicate a growing probability of transitioning to a risk-off INFLATION Market Regime.

Investors should understand the key portfolio construction considerations for each Market Regime. If you need help understanding these high-impact portfolio pivots, we are here to help.

2. The Difference Between Retail And Institutional Investors

The key difference between the average retail investor and institutional investor lies in their approach to market signals. Institutional investors have robust observational processes that allow them to adjust their positions when signals change.

In contrast, retail investors usually build their portfolios based on their [oft-erroneous] predictions about the future, and when data disconfirms their narratives, they lack a robust-enough observational process to help them reposition their portfolio in time to make or save money.

We offer our clients these robust observational tools, helping them recognize when market and/or economic conditions shift so they can adjust their portfolio positions accordingly.

3. The West Village-Montauk Effect Is Contributing To The Resiliency Of The US Consumer

The “West Village-Montauk Effect” can be summarized as follows: With a substantial stock of savings, there is less pressure to save a significant portion of your disposable income.

We are witnessing this effect in relation to the US consumer. Since the close of 2019, households have experienced a boost in wealth:

Household cash reserves have surged by 135%.
Household net worth has increased by 34%.
Nominal disposable personal income has increased by 27%.
Inflation has surged by 21%.

To date, this business cycle features household cash, net worth, and nominal disposable personal income each having grown at rates that have exceeded inflation.

That’s a wrap!

If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.

How Will The Election Year Impact Asset Markets?

Darius joined Victor Jones this week to discuss the impact of the PBOC’s policies, inflation, the election year, 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. Policies Coming Out Of The PBOC Have Had A Meaningful Impact On Asset Markets This Year

Since December of last year, we have called for Beijing to implement front-loaded policy support as we entered 2024.

That is what we have witnessed, and that front-loaded policy support has had two significant impacts on global financial markets:

It has contributed to the uptrend in global liquidity, as evidenced by our 42 Macro Global Liquidity Proxy, an estimate for global liquidity calculated by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold.
It has supported a rebound in Chinese PMI, suggesting the narrative around the Chinese economy being a black hole is changing at the margins.

2. The “Immaculate Disinflation” Theme Is Likely to Persist For Another Quarter Or Two

Over the past two months, we have seen Headline PCE, Core PCE, and Sepercore PCE Deflator accelerate to well above trend rates on a three-month annualized basis.

However, investors do not need to be highly concerned about those increases at the current juncture because:

Productivity growth remains above trend.
Leading indicators such as the “Prices” and “Supply Chain” components of PMIs continue to indicate a likely deceleration in inflation.
The “Shelter” component of inflation has not meaningfully decelerated despite ample housing price disinflation in the pipeline.

We believe the “Immaculate Disinflation” theme may persist for another quarter or two before inflation bottoms at an unpalatable level relative to the Fed’s mandate. At that point, we believe the narrative around inflation is likely to change, and asset markets are likely to be impacted.

3. Fiscal Policy Is Likely To Continue Supporting Asset Markets Heading Into The Election

One reason we have been bullish on risk assets is that we believed President Biden and Treasury Secretary Yellen would implement favorable fiscal and net financing policies this year, supporting our “Resilient US Economy” theme and US liquidity.

We believe the election remains a risk-on catalyst for now. However, asset markets are likely to face headwinds after the election.

Sometime in Q4, we anticipate the RRP balance to have declined to at or near zero and the TGA balance to have decreased by $250B from current levels. Those estimates represent dangerous starting points ahead of another round of debt ceiling negotiations on the horizon is poised to induce volatility in 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!

China’s Role In The Global GOLDILOCKS Market Regime

Darius joined Nicole Petallides on Schwab Network last week to discuss the outlook for asset markets, China, inflation, and more.

If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:

Although There Is An Elevated Risk of A Short-Term Correction, We Are Unlikely to Exit The Risk-On Market Regime Until Mid-year, At The Earliest

China has been a positive contributor to the current GOLDILOCKS Market Regime. In mid-December, we authored a view that China would front-load policy support at the beginning of this year. That is what we have witnessed, as the PBOC has been actively implementing monetary policies to support the economy. Moreover, China has revealed ambitious economic targets for 2024, aiming for a 5% GDP growth, the creation of over 12 million jobs, and a 3% inflation rate. To meet these targets, the PBOC will likely continue easing policy, and that is likely to continue supporting global liquidity.
We remain in the GOLDILOCKS Market Regime that we have been in since November, and we see further upside potential ahead to at least mid-year. That said, a short-term correction would be healthy and would allow the market to extend its bullish momentum further into the year.
Looking further out, we believe inflation is likely to rise in the second half of the year. As a result, we believe the Fed is unlikely to achieve the three rate cuts this year currently projected in the Fed’s Dot Plot, and any rate cuts the Fed implements will likely come in June and July and are likely to be the only ones. This rise in inflation, if it does occur, is likely to prompt both the Fed and asset markets to readopt the “higher for longer” narrative, putting an end to the current GOLDILOCKS Market Regime.

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!