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:

1. 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. 
2. 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! 

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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! 

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What The Pivot to A REFLATION Market Regime Means For Asset Markets

Darius sat down with Julia La Roche last week to discuss the recent transition to REFLATION, inflation, rate cuts, and more.

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

1. REFLATION Is Now The Top-Down Market Regime

Last week, we experienced a Market Regime shift from the perspective of our 42 Macro Global Macro Risk Matrix from GOLDILOCKS to REFLATION. 

REFLATION introduces a distinct set of Market Regime guidelines that investors should consider for their portfolio construction:

• Risk Assets > Defensive Assets
• High Beta > Low Beta
• Growth > Value
• Cyclicals > Defensives
• Small & Mid Caps > Large Caps
• International > US
• EM > DM
• Spread Products > Treasuries
• Short Rates > Belly > Long Rates
• High Yield > Investment Grade
• Industrial Commodities > Energy Commodities > Agricultural Commodities
• FX > USD

Given that both GOLDILOCKS and REFLATION are both risk-on regimes, investors may not need to make significant adjustments to their portfolios for this particular regime transition.The big pivot investors must make in a GOLDILOCKS-to-REFLATION phase transition is being incrementally longer of Risk Assets relative to Defensive Assets. 

2. “Sticky Inflation” Is Likely To Be A Consensus Theme By The End of The REFLATION Market Regime

The January CPI Report revealed signs of sticky inflation:

• Headline CPI accelerated to 2.8% on a 3-month annualized basis, a value above its 2015 to 2024 trend
• Core CPI spiked to 3.9% on a 3-month annualized basis, a value above its 2015 to 2024 trend
• Supercore CPI accelerated to 6.5% on a 3-month annualized basis, a value above its 2015 to 2024 trend

Given the apparent lack of restrictiveness of the current policy in place by the Fed and the resilience of the labor market, a return to 2% inflation seems unlikely at this current juncture.

Moreover, a divergence between CPI and PCE Deflator statistics has emerged in recent months. We believe this divergence is likely to persist for another one to two quarters, allowing the “immaculate disinflation” theme to continue and asset markets to rally during this period.

3. Money Markets Are Pricing In A More Aggressive Rate Cutting Cycle Compared to The Fed’s Dot Plot Projections

The conventional wisdom among average investors is that rate cuts are only observed when the Federal Reserve begins to lower the policy rate. However, the reality is more nuanced – asset markets, not just in the US but across major economies, are deeply influenced by broader financial conditions rather than solely relying on the observed level of the policy rate. 

At 42 Macro, we review policy rates set by the Fed, ECB, Bank of England, and Bank of Japan, as well as the overnight index swap rates relative to the policy rate, which reflects market expectations regarding rate hikes or cuts over the next 3, 6, 9, and 12 months. For the past six months, we have consistently observed negative spreads across OIS curves for the Fed, ECB, and Bank of England. 

From our standpoint, this suggests that the rate cuts have effectively already occurred. Looking ahead to the next quarter or two, we anticipate observing incremental evidence of eased financial conditions.

That’s a wrap! 

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How Long Will The Fed Hold?

Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss the recent transition to REFLATION, NVIDIA earnings, China, and more.

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

1. The Market Regime Transitioned From GOLDILOCKS to REFLATION Last Week

We utilize the 42 Macro Global Macro Risk Matrix to nowcast the prevailing Top-Down Market Regime. We do this via scoring the 42 most crucial macro markets globally via our Volatility Adjusted Momentum Signal (VAMS) and GRID Asset Market Backtests. These scores are then tallied, with the regime encompassing the highest number of markets emerging as the Top-Down Market Regime.

As of last week, REFLATION, characterized by a risk-on environment where investors tend to be rewarded for assuming higher risks due to perceived acceleration in nominal economic growth or better than expected economic performance without policy constraints, now holds the largest share of confirming markets. 

We anticipate that this risk-on Market Regime is likely to persist until around midyear. For consistent performance, investors should align their portfolios in accordance with the prevailing Top-Down Market Regime.

2. The Tech Bubble Is Likely to Persist At Least Until Around Midyear

In its quarterly earnings release last week, NVIDIA reported a revenue of $22.1 billion, surpassing analysts’ estimates by $1.7 billion, which had projected revenue to be $20.4 billion. 

Prior to the release, the 42 Macro Positioning Model indicated that positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds indicated a probability of a further short-term market correction. The earnings release indicated NVIDIA beat their revenue estimates by 8%, and despite a temporary dip in response to the news, the stock surged by 24% over the next two days.

We don’t believe the tech bubble is likely to become unwound at this current juncture, especially if REFLATION persists as the Top-Down Market Regime over the next quarter or two.

3. PBOC Policies This Year Have Largely Supported Asset Markets 

Since December, we’ve called for Beijing to implement front-loaded policy support as we entered 2024. 

That’s what we’ve witnessed, as the PBOC has been actively implementing monetary policies to support the economy. Its balance sheet is expanding, claims on banks are rising, and it is reducing the loan prime rate while committing to providing additional lending to specific sectors of the economy. 

Through these measures, the PBOC is attempting to revive the Chinese economy. Instead, it is positively contributing to global liquidity, bolstering the risk-on Market Regime in asset markets.

That’s a wrap! 

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Navigating Shifts In Global Liquidity

Darius sat down with Gordon Johnson last week to discuss the macro outlook for asset markets, the fourth turning, China, and more.

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

1. US Liquidity Is Likely to Peak Around Midyear 

The Federal Reserve has significantly increased the supply of Treasury bills, accounting for 69% of the total net marketable borrowing on a TTM basis through the first quarter. 

This has led to a reduction in the RRP and an injection of liquidity into the financial system, supporting asset markets. However, this trend is likely to shift in Q2, with the proportion of Treasury bills in net marketable borrowing dropping to 49% on a TTM basis. 

As a result, the drain on RRP will likely be halted, potentially impacting the favorable liquidity conditions supporting the stock market’s recent positive performance.

2. During The Fourth Turning Regime, Inflation Is Likely to Remain Elevated

Our research indicates that Headline CPI typically exhibits faster growth during Fourth Turning regimes, averaging 2.1%, in contrast to the 1.2% observed during the First, Second, and Third Turnings. 

As a result, we anticipate a shift towards a more inflationary climate over the next decade, diverging from the relatively stable price levels experienced in recent decades.

Consequently, this evolving landscape is likely to prompt the Federal Reserve to engage more actively in debt and deficit monetization, a trend we believe is likely to intensify over the coming decade.

3. China’s Structural Liquidity Trap

China is currently facing a structural liquidity trap, similar to the situation Japan encountered starting in the early 1990s. In this structural liquidity trap, additional credit growth in China is not effectively fueling economic expansion. Instead, it is primarily being used to roll over existing debt, allowing them to refinance current obligations.

Moreover, the expansion of the PBOC’s balance sheet has been largely driven by China’s foreign exchange reserves, a trend that halted in 2015. That said, incremental policy adjustments such as reducing the reserve requirement ratio (RRR), cutting loan prime rates, and bolstering medium-term financing are creating positive global liquidity conditions. 

These policy measures have had a positive impact on asset markets and have been contributing to the current GOLDILOCKS Market Regime. 

That’s a wrap! 

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Will Global Liquidity Push Bitcoin To All-Time Highs?

Darius sat down with Anthony Pompliano last week to discuss the outlook on asset markets, global liquidity, Bitcoin, and more.

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

1. While There Is An Elevated Risk of A Short-Term Market Correction, The Outlook For Asset Markets Remains Bullish Over The Medium-Term

The 42 Macro Positioning Model indicated that retail positioning had been heavily overweight stocks.

However, after the recent correction, that overweight positioning has dissipated. Despite this, current positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds suggest the possibility of a further short-term market correction.

Looking ahead, the medium-term perspective is likely to be more optimistic. We are still in GOLDILOCKS, and the 42 Macro Weather Model indicates the Top-Down Market Regime has a high probability of remaining in a risk-on condition, either GOLDILOCKS or REFLATION, over the next three months.

2. Global Liquidity Heavily Influences Asset Markets

The 42 Macro Global Liquidity Proxy, an estimate for Global Liquidity, is calculated by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold.

The 42 Macro Global Liquidity Proxy is highly correlated to most assets, including corporate bonds, treasury bonds, crypto, and stocks. Only trend stationary markets like currencies and commodities fail to have a significantly high degree of correlation and/or correlation to the 42 Macro Global Liquidity Proxy.

Understanding the drivers of global liquidity, such as potential shifts in central bank policies, variations in credit growth across different economies, and other pivotal factors, is crucial for investors. By closely monitoring these drivers and tracking leading indicators of global liquidity, investors can better position themselves to navigate market risks and capitalize on emerging opportunities.

3. Bitcoin Is Likely To Appreciate Significantly Due To Fourth Turning Tailwinds  

The flows into the various Bitcoin ETFs over the past couple of weeks suggest growing investor confidence in Bitcoin’s viability. We believe this momentum is likely to continue. 

In the context of the Fourth Turning regime, which is likely to span the next decade, our research suggests an environment marked by structurally elevated inflation and budget deficits. These conditions are likely to spark a surge in demand for alternative assets like Bitcoin. 

Although there will be periodic downturns, we maintain a long-term outlook that Bitcoin’s value is likely to appreciate significantly.

That’s a wrap! 

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Green Shoots or Rising Risk?

Darius sat down with Ash Bennington last week on Real Vision’s Daily Briefing to discuss the probability of a soft landing, the outlook for asset markets, and more. 

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

1. The Recent Inflection in The Sovereign Fiscal Balance to Nominal GDP Ratio Indicates A Slightly Less Bullish Outlook for Asset Markets

Our models indicate asset markets are becoming less bullish at the margins.

We have seen a notable shift in the Sovereign Fiscal Balance to Nominal GDP Ratio, transitioning from a negative to a positive trend. This shift indicates a reduction in the fiscal stimulus that has previously bolstered the resilience of the US economy. 

While these changes signal a more cautious outlook for asset markets at the margins, they do not pose significant concerns at the current juncture.

2. The Probability of A Soft Landing Remains High

Recently, we have witnessed a rebound in productivity growth.

This upswing in productivity is significant because to achieve a soft landing, at least two of the following three conditions are typically required:

1. Sustained at-trend or above-trend productivity growth
2. Supportive monetary policies from the Federal Reserve
3. At-trend or above-trend government expenditures

Encouragingly, all three conditions have been met in recent months, significantly boosting the likelihood of a soft landing. As of now, the outlook remains positive, with few indicators suggesting the GOLDILOCKS regime is likely to change in the short term.

3. Throughout 2024, Strength Across The Major Global Economies May Cause An Upside Surprise in Asset Markets 

The latest January Global Composite PMI data indicates a bottoming in the UK, Eurozone, Japan, and Global PMIs, signaling a collective upswing in economic activities across these regions.

Additionally, signs are emerging that point towards potential factors that may lead to growth surprises, which in turn could bolster asset markets vis-a-vis a weakening dollar, enhanced global liquidity, and improved earnings projections.

That’s a wrap! 

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Is Bitcoin Data Giving The Green Light?

Darius sat down with Anthony Pompliano last week to discuss global liquidity, the Macro Weather Model, Bitcoin, and more.

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

1. Our 42 Macro Weather Model Is Suggesting A Less Bullish Outlook Over The Medium Term

In our previous appearance on The Pomp Podcast, our Macro Weather Model signaled a bullish 3-month outlook for risk assets. 

However, as of last week, the model has signaled neutral outlooks for both the stock market and Bitcoin over a three-month timeframe. 

While these signals are not explicitly bearish, they indicate a shift toward a more bearish environment. 

This change is primarily driven by the Sovereign Fiscal Balance to Nominal GDP Ratio, which has recently inflected to a positive trend. 

This implies a lower fiscal impulse compared to 2023, potentially leading to a less favorable environment for risk assets.

2. We Believe Global Liquidity Is Likely To Continue Trending Higher Over The Next Quarter or Two

Our 42 Macro Net Liquidity Model, which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance, is trending higher.

Similarly, our 42 Macro Global Liquidity Proxy, which is calculated by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold, is also trending higher.

Furthermore, leading indicators for both the Net Liquidity Model and Global Liquidity Proxy suggest a sustained positive trend in liquidity for at least the next two quarters.

3. We Expect Bitcoin Will Perform Well Over The Long Term

We recommend investors view Bitcoin simply as an additional asset class to maintain a rational perspective and avoid becoming too emotionally invested in the asset. 

That said, it is important to note that the introduction of the ETF is a structurally positive fundamental, likely to boost inflows into this asset class over the long term. 

Additionally, our research into the Fourth Turning indicates we will likely experience well-above-trend inflation over the next decade. 

As a result, the traditional 60/40 investment portfolio is unlikely to yield the same returns it did in the past decade. 

This scenario is likely to prompt investors to seek alternative investment opportunities, and we anticipate a significant portion of this capital redirection towards alternative assets, with Bitcoin being a favored destination among millennial, gen-z, and tech-focused investors.

That’s a wrap! 

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What Should You Expect From The Bitcoin ETF?

Darius sat down with Anthony Pompliano last week to discuss the Bitcoin ETF, global liquidity, and more.

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

1. Our Wall Street Clients Are Closely Watching The BTC ETF Approval

BTC’s price appreciation throughout 2023 has fueled the excitement among Portfolio Managers and RIAs.

Generally, reception from our institutional clients for the BTC ETF has been warm, and we expect BTC to perform well over the long term as a result.

2. Favorable Market Conditions And An Increase In Tax Efficiency Support Flows to BTC

Many institutional investors have avoided BTC due to the complexities of tax reporting. 

An ETF is a tax-efficient investment vehicle, so we expect it will increase inflows into the asset class.

With a vast multi-trillion dollar pool in investment advisory allocations, we believe there will be a shift at the margins from traditional alternative investments like gold, commodities, and real estate towards BTC. 

Additionally, we believe the current GOLDILOCKS regime will support inflows into the asset class over the short term. 

3. We Expect Global Liquidity to Continue Increasing Over The Medium Term

Over the past two quarters, our 42 Macro Net Liquidity model, which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance, has maintained an upward trend.

Similarly, our 42 Macro Global Liquidity Proxy, which is derived by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold, has also shown an upward trend in the past few quarters. 

This model is particularly significant for projecting asset market performance. 

In addition, there are a number of leading indicators that support robust private-sector liquidity creation. 

Based on these factors, we anticipate a continued increase in liquidity over the medium term.

That’s a wrap! 

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Is It Time To Get Risky in Crypto?

Darius sat down with  Paul Barron on the Paul Barron Network last week to discuss the “soft” vs. “hard” vs. “no” landing debate, Bitcoin ETF, earnings, and more.

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

1. Near Textbook Disinflation in The Super Core PCE Deflator Suggests That The Fed May Safely Land The Inflation Plane At 2% In The Coming Quarters

The likelihood of a soft landing for the economy has increased, as highlighted by last week’s PCE report. 

Notably, the 3-month annualized rate of inflation change stands at 2.1%, and the 6-month rate is at 1.9% – figures that align closely with the Federal Reserve’s target inflation rate of 2%. 

These readings suggest that year-over-year inflation is set to decline towards 2% in the upcoming quarters.

This downward trend in inflation is reinforcing the soft landing scenario currently being priced into asset markets.

2. We Believe Upcoming Earnings Reports Will Outperform Recent Quarters 

Signs of enhancement in corporate profitability are already evident. 

Our Corporate Profitability model, which tracks the spread between Gross Domestic Income growth minus the spread between Unit Labor Cost and Productivity, shows that Corporate Profits bottomed a few quarters ago and have improved since. 

According to the model, earnings are expected to continue improving. 

Should this trend persist, it will act as a tailwind for asset markets.

3. The Impact of The Bitcoin ETF Will Take Time to Materialize

The approval of a Bitcoin ETF is likely to have a long-term positive impact on BTC, as it will introduce structural inflows into the asset class. 

However, it is important to note that these benefits will not be fully captured immediately upon the ETF’s approval. 

We believe that much of the anticipated impact is already factored into current prices, due to market participants front running the event. 

That said, the ETF is not the sole influencer of Bitcoin’s price. Factors such as inflation, economic growth, policy changes, and liquidity also play crucial roles in determining Bitcoin price trends. 

Investors aiming to stay informed about Bitcoin’s future trajectory should monitor these metrics closely.

That’s a wrap! 

If you found this blog post helpful:

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3. Have a great day!