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! 

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!

The Current State of China

Darius sat down with Anthony Pompliano last week to discuss China’s economic landscape.

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

1. The Evergrande Debt Default May Have Spillover Effects on The Broader Chinese Economy

One of Evergrande’s subsidiaries recently defaulted on nearly 600 million dollars worth of principal and interest payments.



The implications are significant for two reasons:

A bankruptcy of Evergrande’s size could lead to knock-on effects for the Chinese economy.

2. If China Does Not Issue Large-Scale Fiscal Stimulus, They Will Likely Remain In Their Liquidity Trap.

China and Japan supplied trillions of dollars in global liquidity from Q4 2022 to Q1 2023, a primary factor in the BTC and stock market recovery we have seen so far this year.



But if China does not issue large-scale fiscal stimulus, they will likely fall back into their “liquidity trap”:

Today, China’s economy looks very similar to Japan’s from the early 1990s. 

3. Just Because The Chinese Economy Has Downshifted From A Growth Perspective Does Not Mean It Will Stop Demanding Energy Products

The volume of Crude Oil imports is near all-time high levels established in 2020.

Conversely, the volume of Copper imports is down 38% from the 2020 highs. 

This is significant because Crude Oil creates inflation across the global economy, while Copper more closely signifies underlying demand for materials and goods and is correlated to growth.

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!

Buy The Dip Until “Immaculate Disinflation” Transitions To “Sticky Inflation”

A return of inflation pressure destroys the “transitory GOLDILOCKS” narrative and potentially derails the actual GOLDILOCKS US economy that has supported risk assets for the past few quarters, paving the way for a cross-asset crash. Our qualitative research views expect that process to occur within 3-6 months. Our best guess based on the momentum in key inflation time series and the labor market is sometime around yearend or early in the new year.

Emphasis on “guess”. We deliberately never speak in certainties about the future; the only investors that do are those chasing clout on podcasts and social media platforms. Beware conviction from folks that lack the DEEP, DAILY Bayesian inference process required to understand the full distribution of probable economic and financial market outcomes.

If we are wrong on the timing of the handoff from “immaculate disinflation” to “sticky inflation” and it happens much sooner than our 3-6 months [from now] projection, our Global Macro Risk Matrix will transition from risk-on REFLATION to risk-off INFLATION early in that process. Such a shift would be your queue to shift from a buy-the-dip mentality to a sell-the-rip mentality in asset markets. It would also be your queue to pivot defensively from a factor tilt perspective. Until then, we remain constructive on risk in accordance with the “transitory GOLDILOCKS” that we co-authored with our friend Bob Elliott in January.

Even Higher For Much Longer

Global bond yields hit their highest level since 2008 as investors were forced by the data we have been highlighting to reprice economic resiliency in places like the US and Japan, as well as sticky inflation in places like the Eurozone and UK.

Last week’s Industrial Production (+210bps to a 2mo high 3mo SAAR of -0.9% in July), Capacity Utilization (+70bps to a 2mo high of 79.3% in July), Building Permits (+590bps to a 3mo high 3mo SAAR of 7.1% in July), Housing Starts (+2,560bps to a 2mo high 3mo SAAR of 30.9% in July), and NY Fed Services Activity Survey (+0.6pts to 0.6 in August; highest since Sep-22) were each marginally confirming of our “resilient US economy” theme.

Market participants are increasingly accepting the “higher for longer” guidance we have seen from a handful major central banks — most notably the Federal Reserve.

Floor policy rate expectations (min value on OIS curve out 2yrs) for the ECB, Fed, and BOE have climbed +3bps, +39bps, and +37bps MoM, respectively.

That’s dragged 10yr Nominal German Bund, US Treasury, and UK Gilt Yields up +18bps, +48bps, +37bps, respectively, over that same duration.

The 10yr Nominal JGB Yield — which is effectively managed by the BOJ — is even up +22bps MoM.

China’s Structural Liquidity Trap Rears Its Ugly Head

The economic situation in China continues to be an unmitigated disaster, with the July Retail Sales, Industrial Production, and Fixed Assets Investment all slowing and missing consensus estimates.

Animal spirits in China are being weighed down by beleaguered private sector balance sheets. With respect to liabilities, China remains one of the most indebted major economies in the world. With respect to assets, China’s property market — the #2 asset for Chinese citizens behind bank deposits — has yet to recover from the beating it took from the 1-2 punch of “Zero COVID” and Emperor Xi’s “Three Red Lines” macroprudential policy.

All told, the Chinese economy is doing exactly what we thought it would do in the absence of large-scale fiscal stimulus — i.e., return to the structural liquidity trap it was mired in prior to COVID.