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The 42 Macro Investment Process

Darius joined our friend Tony Sablan on the Unscripted Arena podcast to discuss Darius’ unique background, the 42 Macro risk management process, overcoming cognitive biases in investing, 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. Stop Relying On Predictions If You Want To Make Money In Financial Markets

Making money in asset markets is not about predicting future developments in the economy. It is impossible to generate consistently accurate forecasts for every relevant growth, inflation, and policy catalyst, across economic cycles. Moreover, any investor who believes they can accurately forecast the future with enough precision to position for each meaningful surprise in the data relative to consensus expectations is either a newsletter-writing charlatan or someone who has succumbed to the Illusion of Validity. 

Instead, making and saving money in asset markets is about positioning yourself on the right side of market risk, which equates to being long assets that are trending higher and short or out of assets that are trending lower. 

An overwhelming focus on predicting the future will only hinder your ability to respond to critical inflections in momentum with enough speed and confidence to manage risk consistently and effectively. You don’t have to predict things like “liquidity”, “flows”, etc. to benefit from trends and inflections in those cycles, just as long as you remain disciplined about your risk management process. 

2. Investors Should Position According To The Current Market Regime

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

  1. Identify and position for the Market Regime
  2. Prepare for regime change using quantitative signals with our Macro Weather Model
  3. Prepare for regime change using qualitative signals via our fundamental research

Since mid-November, we have remained in a risk-on Market Regime, currently REFLATION. That means you should have been overweight risk assets like stocks, credit, commodities, and crypto and underweight defensive assets like Treasury bonds and the US dollar every day since. 

As an institutional investor, you should also understand the key portfolio construction considerations for each Market Regime. If you need help understanding these critical factor tilts, we are here to help.

3. Our Macro Weather Model Systematically Nowcasts Momentum Across The Principal Components of Macro

The Macro Weather Model is our process for analyzing several principal components of macro and translating those components into a 3-month outlook for major asset classes, including stocks, bonds, the dollar, commodities, and Bitcoin.

This model monitors indicators that reflect both the real economy cycles and financial economy cycles:

Currently, the Macro Weather Model suggests a bearish three-month outlook for stocks and bonds, a neutral three-month outlook for commodities and Bitcoin, and a bullish three-month outlook for the US dollar. In totality, our Macro Weather Model currently suggests the Market Regime has a moderate risk of experiencing a RORO phase transition (i.e., risk-on to risk-off, or vice versa) to a risk-off Market Regime within three months. 

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.

Is There Further Upside Risk In Asset Markets?

Darius joined David Hunter last week on our Pro to Pro Live to discuss the 42 Macro Positioning Model, the outlook for asset markets, our “Green Shoots Globally” theme, 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 There Is Likely Additional Risk To The Upside Over The Medium Term

Bears have found themselves reluctant to join the recent rally in equities. 

Our 42 Macro Positioning Model monitors the aggregated non-commercial net length as a percentage of total open interest in the combined futures and options markets for US Equities. Currently, this indicator sits in the 33rd percentile of readings, notably lower than the median reading of the 62nd percentile seen at major bull market peaks.

Despite the significant market rally, we have yet to witness the structural upside capitulation characteristic of bull market peaks. This absence suggests there is likely potential for further upside over the medium term, although there may be a correction in the near term.

2. Cash On The Sidelines Stays On The Sidelines Until There Are Reasons For It To Exit

Currently, over $6 trillion is parked in money market funds. 

Our analysis, spanning the last four cycles—2020, 2008, 2001, and 1991 —reveals a consistent pattern: cash on the sidelines tends to stay put in these funds until after a crash, recession, and rate cuts have each taken place.

We anticipate this cycle will follow suit, with the bulk of cash on the sidelines staying put until these pivotal events unfold.

3. “Green Shoots Globally” Continues To Support Risk Assets

In January, we authored our “Green Shoots Globally” theme that was supportive of asset markets.

The theme persists, as our models show that every major economy in the world has a Composite PMI trending higher—a bullish leading indicator suggesting what is likely to occur over the next three to six months from an economic standpoint. 

Moreover, we track the number of industries reporting growth in the ISM Manufacturing survey. In December, that number bottomed. Our backtests have found that in the year following the bottom, the S&P generates a median return of 28%. While this is just one data cyclical framework to respect, it strongly suggests that the broadening of market breadth stemming from improving global fundamentals is likely to continue.

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!

What Will Push Powell to Cut?

Darius joined Maggie Lake on Real Vision’s Daily Briefing this week to discuss the resiliency of the US economy, Immaculate Disinflation, Bitcoin, 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. The US Economy Remains Resilient

In September 2022, we authored our “Resilient US Economy” theme, and the prevailing data today continues to support this narrative.

Furthermore, our research indicates that the Fed is likely to implement easing monetary policies over the medium term. This confluence of factors—a robust economy operating at or above trend coupled with supportive monetary measures—has fostered a bullish environment for asset markets.

We believe asset markets are likely to continue performing well until either our “Resilient US Economy” theme dissipates or the “Immaculate Disinflation” theme concludes, forcing the Fed and Treasury to officially pivot to hawkish forward guidance and net financing policy. 

2. Recent Labor Market Data Indicates Evidence of Sticky Inflation

The Feb JOLTS report confirmed that “Immaculate Slackening” persists, but investors should be worried by the apparent bottoming in turnover:

An increase in employee turnover could disrupt the “Immaculate Disinflation” narrative.  Because workers who change jobs tend to have faster wage growth, the bottoming in these indicators suggests that we may be running out of steam concerning the disinflation we have observed in wages. 

Despite the February JOLTS report supporting sticky inflation, we continue to believe the “Immaculate Disinflation” theme is likely to persist for another quarter or two.

3. Bitcoin’s Current Correction May Worsen If The “Immaculate Disinflation” Narrative Dissipates

After rallying 75% from Feb 1st to March 10th, Bitcoin is currently in a consolidation period.

We anticipated this pullback. Over the past month, we have highlighted several extended tactical positioning indicators in our positioning model to our clients, such as the AAII Bulls Bears Spread and AAII survey, that suggested markets were likely overbought.

If the “Immaculate Disinflation” narrative loses steam, the current correction could deepen. If that occurs, investors would need to pull forward their timeline expectations of a transition from a risk-on REFLATION Market Regime to a risk-off INFLATION 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!

A Glimpse Into Bitcoin

Darius joined Dylan LeClair last week to discuss the outlook for Bitcoin, how it fits into the 42 Macro KISS Portfolio Construction Process, ETF flows, 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. Understanding The Correlation Between Bitcoin’s Price And Volatility Is Crucial to Grasping The Dynamics of The Asset Class

Our research at 42 Macro indicates that although equities and fixed income are generally inversely correlated to volatility, Bitcoin tends to be positively correlated to its historical and implied volatility.

Moreover, our 42 Macro Volatility Adjusted Momentum Signal (VAMS) scores volatility relative to price to determine whether an asset is bullish, bearish, or neutral.  

Following our VAMS signals has allowed our clients to be on the right side of market risk and remain long during Bitcoin’s large upswings this year. Investors who plan to add Bitcoin to their traditional multi-asset portfolio would be well advised to understand the correlation between Bitcoin’s price and volatility to ensure they are positioned for its large, volatile moves. At 42 Macro, we can help you do exactly that.

2. Investors Can Prudently Gain Exposure to Bitcoin Through The KISS Portfolio Construction Process

Our KISS Portfolio Construction Process, a 60/30/10 trend-following approach, helps clients gain exposure to Bitcoin from legacy strategies such as the traditional 60/40 portfolio.

The current allocation of our KISS Portfolio, determined using our Global Macro Risk Matrix and VAMS for dynamic position sizing, is 10% in Bitcoin, 60% in SPY, 15% in AGG, and 15% in USFR.

Although we have a positive outlook on Bitcoin’s future performance, mere belief is not sufficient to allow us to take a position. Our decision-making process relies on signals derived from the current market regime and signals from our VAMS. At 42 Macro, we help investors make money and protect gains in financial markets, and it is through strategies like KISS that we have empowered our clients to achieve these objectives. 

3. The 2024 Bitcoin ETF Inflows Have Far Exceeded Expectations

The immediate success of the Bitcoin ETF out of the gate has been remarkable. 

IBIT has been the most successful ETF launch in history, gaining an impressive $15 billion in AUM in the first two months.

However, Dylan informed our audience that the current demand for Bitcoin has primarily originated from Blackrock, Fidelity, and other institutional investors. Additionally, ETF issuers have indicated that the current buyers of BTC ETFs do not represent some of the largest pools of capital; those significant investors have yet to enter the market.  As a result, we anticipate a fresh surge of capital inflows into the asset class in the coming quarters, which is poised to drive prices even higher.

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!

Bitcoin, Stocks All-Time Highs: Remain Bullish?

Darius joined Anthony Pompliano last week to discuss the outlook for inflation, global liquidity, asset markets, and more.

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

1. The February CPI Report Showed Signs of Sticky Inflation

The February CPI report did incremental damage to the immaculate disinflation narrative. 

Headline CPI accelerated to 3.9% on a three-month annualized basis, more than double its pre-covid trend. The spike was largely driven by an acceleration in Energy CPI to 4.5% on a three-month annualized basis.

Moreover, Core CPI accelerated to 4.1% on a three-month annualized basis. The increase was largely driven by Services CPI, which remained at 6.0% on a three-month annualized basis, and Super Core CPI, which accelerated to 6.7% on a three-month annualized basis, more than triple its pre-Covid trend.

2. The February NFIB Small Business Optimism Survey Supported The Soft Landing Scenario

The February NFIB Small Business Optimism survey, a monthly survey that provides insights into the confidence levels and outlook of small business owners, indicates that inflation may continue declining over the medium term. 

The sub-indices of the survey, including the Higher Prices, Price Plans Next Three Months, Compensation, and Compensation Plans indices, all slowed sequentially and are at multi-year lows.

These readings suggest that although we see signs of sticky inflation in the CPI and PCE Deflator reports, stickiness is likely to be transitory and that inflation will resume its downtrend over the medium term.

3. Global Liquidity Is Likely to Continue Trending Higher Over The Next One to Two Quarters 

The monetary policies implemented by the PBOC this year have been very positive for global liquidity. Additionally, China recently 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 aggressive economic targets, the PBOC will likely continue easing policy, and that is likely to continue supporting global liquidity.

Moreover, several key countercyclical drivers of global liquidity have supported liquidity creation in the private sector. 

The dollar, bond market volatility, and currency market volatility have all trended in directions that support private sector liquidity creation, and we believe these trends are likely to continue over the next quarter or two.

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

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!

Is Bitcoin Going to $250k?

Darius sat down with Anthony Pompliano last week to discuss the outlook for Bitcoin, global liquidity, reducing portfolio risk, and more. 

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

1. Our Models Indicate Bitcoin Is Likely to Remain Bullish Until At Least Mid-Year

The 42 Macro Weather Model is currently generating a bullish outlook for Stocks, Bonds, and Bitcoin over the next three months. These bullish signals suggest each asset class is likely to experience above-median returns over the next three months relative to baseline. 

Given these favorable conditions, now is an excellent time to take risks in the markets – a stance we have advocated to our audience since November.

2. China Has Been A Dominant Driver of Global Liquidity This Year 

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. Its balance sheet is expanding, claims on banks are rising, and it is reducing various policy rates while committing to providing additional lending to specific sectors of the economy. 

However, we believe the positive global liquidity impulse is likely to dissipate in the second half of the year. To stay on the right side of market risk, investors must identify these shifts in global liquidity in real time and position their portfolios accordingly. Our Macro Weather Model and Global Macro Risk Matrix are among the best available tools for that. 

3. Bitcoin Is Best Managed In The Context of A Traditional Multi-Asset Portfolio With Risk Management Overlays

Bitcoin ETFs have seen record-breaking volumes since their launch in January. As of the market close on February 28th, ETFs reached a volume of $7.6 billion, surpassing previous records.

However, investors in ETFs lack the risk management overlays offered by our 42 Macro KISS Portfolio Construction Process. As a result, many may find themselves max-long Bitcoin during significant drawdowns. Bitcoin has experienced four drawdowns of -75% or more and another two in excess of -50%. That is six times investors could have lost half-to-four-fifths of their money in the asset class.

In contrast, our KISS portfolio, a 60/30/10 trend-following portfolio comprising SPY, AGG, and FBTC, has delivered an average annual return of +13% since 2018, with a maximum drawdown of -11%. Without our risk management overlays, investors would have seen similar returns in a 60/30/10 SPY/AGG/Bitcoin portfolio with a maximum drawdown of -26% and three crashes in excess of -20% since the start of 2019.

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!

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! 

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!

Navigating Bullish Horizons

Darius sat down with Erik S Townsend and Patrick Ceresna on Macro Voices last week to discuss our systematic portfolio construction process, corporate profits, fiscal policy, and more. 

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

1. A Rebound In Corporate Profits And Productivity Growth Suggests The Probability of A Soft Landing Remains High

The 42 Macro 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 operating margins bottomed a few quarters ago and have improved since. 

This rebound indicates that corporations have a reduced need to shed costs through layoffs or to increase prices for consumers.

This recovery in corporate profits, along with the sharp recovery in productivity growth, suggests the economy may remain resilient, and the probability of a soft landing remains high.

2. Although It Is Shrinking, Fiscal Impulse Is Still Positive At The Margins

The fiscal impulse peaked earlier in 2023 and has shown signs of moderation: the budget deficit on a YTD, YoY basis was up $834 billion in June, $535 billion in August, $255 billion in October, $320 billion in November, and $364 billion in December.

Contributing factors to the fiscal dynamics of 2023 included unique events such as the reduction in individual income taxes due to tax collection disruptions in California and Hawaii, alongside a significant cost of living adjustment spike last year. 

These specific drivers are not likely to recur in 2024 – meaning the fiscal impulse is dissipating at the margins. That said, it is unlikely to fall off a cliff.

3. China’s Fiscal and Credit Dynamics May Lead to An Uptick In Global Commodity Prices And Emerging Markets investments Over The Medium-Term

China’s credit growth and fiscal spending typically peak in the first quarter of the calendar year, as Beijing often front-loads its policy support. 

Moreover, according to our 42 Macro China Liquidity Proxy, January marks the third consecutive month in which China’s liquidity impulse has shown a positive trend. 

Furthermore, Chinese economic growth has stabilized, with the China Composite PMI climbing to 52.6 in the latest reading. This stabilization, particularly when set against modest expectations, may lead to an uptick in global commodity prices and emerging markets investments over the medium term.

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!

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! 

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!