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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!

Is There Still A Risk of Recession?

Darius sat down with Anthony Pompliano last week to discuss interest rates, the Fed, the election year, and more. 

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

1. Lower Worker Turnover Is Supportive of Economic Expansion

The Federal Reserve is closely monitoring the ratio of JOLTS Total Job Openings to Total Unemployed Workers as a measure of labor market slack or tightness. This ratio currently stands at 1.4, which remains above its pre-pandemic levels, indicating a tight labor market that is still relatively tight. 

The Private Sector Hires Rate, holding steady month-over-month at 3.9%, is below the trend observed from 2015 to 2019, suggesting a cooling in hiring momentum. The Private Sector Quit Rate (PSQR) declined to 2.4%, its pre-pandemic level. 

Lower turnover rates, as observed in recent quarters, are supportive of economic expansion by alleviating wage pressure within the labor market.

2. The Probability of A Recession Remains Low

At 42 Macro, we have identified five key leading indicators that are most effective in helping investors predict and position for recessions in their portfolios: the University of Michigan Employment Survey, the Conference Board Labor Survey Differential, the Continuing Claims/Total Labor Force ratio, Cyclical Unemployment, and Temporary Employment.

Among the 42 Macro Fab Five Recession Signaling Indicators, only the Temporary Employment metric signals a significant risk of recession. In contrast, three of the indicators suggest a low probability, and one presents a moderate risk level. 

As a result, we believe the likelihood of a recession remains low at this current juncture. 

3. Asset Markets Are Likely To Generate Positive Returns Throughout 2024

Several positive factors, including a positive fiscal impulse, a resilient economy, and declining inflation, are currently bolstering asset markets. Additionally, stock markets tend to perform well during an election year, especially when the incumbent candidate is from the Democratic Party. 

However, the landscape is somewhat different now compared to the beginning of last year, marked by a decrease in both underpositioned investors and companies trading at reasonable valuations.

Consequently, while we do not anticipate the S&P 500 to replicate its 20% performance from last year, we do believe it may achieve positive gains in line with historical average returns.

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!

Is It Time To Book Gains In Asset Markets?

Darius sat down with Adam Taggart on Thoughtful Money last week to discuss liquidity, investor positioning, the probability of a soft landing, and more.

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

1. Rising Liquidity And Policy Support Are Bullish For Asset Prices 

Liquidity is rising both domestically and globally.

Although the recovery since the bottom of the liquidity cycle in the fall of 2022 has not been linear, the overall trend is higher.

Key indicators that typically lead the liquidity cycle, such as the US dollar, currency volatility, bond market vitality, and crude oil, all point towards a growing supply of liquidity from the global private sector. 

This environment creates a highly bullish context for asset markets – especially if sustained by these indicators and complemented by potential interest rate cuts from the Federal Reserve

2. Our Positioning Model Suggests The Rally Can Continue 

Our 42 Macro Positioning Model tracks a variety of indicators, including:

Currently, the S&P 500 Price/NTM EPS multiple is in the 80th percentile of readings, a level dating back to the 1990s, often associated with bull market peaks. 

However, this signal is not supported by other indicators like the AAII Stock, Bond, or Cash allocations.

This suggests that while the market appears overvalued based on the S&P 500 Price/NTM EPS multiple, it may become even more so as investors are forced to chase positive stock market returns by increasing their allocation to equities. 

3. There Is A Rising Probability of A Soft Landing in The Economy

Over the past two quarters, many economic indicators have evolved in a manner that increases the probability of a soft landing. 

Among these, the acceleration in Nonfarm Productivity stands out, rising to 2.4% on a YoY basis, which is roughly 50 basis points higher than the long-term trend. 

This uptick in productivity growth lessens the pressure on corporations to cut labor costs through workforce reductions or offset these costs by raising consumer prices. 

Furthermore, our corporate profitability model suggests we will likely avoid a deep earnings recession.

This reinforces our views that corporations will not need to resort to mass layoffs or above-trend price increases to protect profit margins.

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!

How Should Bitcoin Fit Into A Traditional Portfolio?

Darius sat down with Anthony Pompliano last week to discuss our KISS Model Portfolio, the outlook on interest rates, Bitcoin, and more.

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

1. We Believe Investors Should Keep Their Investment Process Simple And Systematic… And It Should Include Bitcoin 

In January, we made a strategic shift to our investment approach to our KISS Model Portfolio process, transitioning to a long-only strategy. 

The new process is designed to help traditional investors, RIAs, family offices, and other money managers outperform the conventional 60/40 portfolio in the long run by integrating trend-following strategies and a consistent allocation to Bitcoin. 

The portfolio follows a 60/30/10 allocation, comprising 60% SPY, 30% AGG, and 10% BITO.

For serious investors considering adding a Bitcoin allocation, we emphasize the importance of systematic risk management to navigate this process and achieve smoother returns.

2.  There Is A Significant Amount of Policy Rate Easing Priced Into 2024

The market is currently pricing in a 90+ percent chance of a rate cut by the end of Q2 2024.

This expectation is reflected both in overnight index swaps and federal funds futures, where a considerable amount of policy rate easing is priced throughout next year. 

Moreover, we believe the concurrent rise in both stocks and bonds is fueling expectations of a disinflationary ‘soft landing’ in the months ahead.

3. Our Models Indicate Only A Low-To-Middling Probability Of A Near-Term Recession In the US Economy 

At 42 Macro, we monitor several key indicators that give our clients the ability to spot a developing recession in real-time. 

One of these indicators has crossed its recession-signaling threshold, suggesting a low-to-middling probability of a near-term recession.

However, it is important for investors to maintain perspective. 

Our research indicates that stock markets typically peak around the same time as a breakout in jobless claims and the unemployment rate. Our research also indicates the stock market is typically very buoyant in the months leading up to that peak. 

Therefore, there is no urgency for investors to put on a recession trade prematurely at this juncture.

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 Santa Claus Bring Gifts For Investors This Year?

Darius appeared on Schwab Network last week to discuss the US economy, the probability of a recession, the US consumer, and more.

If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets: 

Both Technicals and Economic Data Suggest The Market Should Continue to Rally Well Into January  

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!

Where Are Asset Markets Headed? 

Darius joined Charles Payne earlier this week on Making Money to discuss where markets are likely headed.

If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets: 

Over The Next Few Months, We Believe The Stock Market Will Continue to Rally, And Dips Will Be Shallow. 

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!

Get Ready For ‘Markets Gone Wild’

Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss Bitcoin, the stock market, the probability of a recession, and much more.

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

1. The US Equity Market Still Has Significant Right Tail Risk Over The Next 3-6 Months

The stock market has historically performed well heading into a recession:

Our research currently indicates a blow-off top in equities in the months ahead given – especially given the starting point of severely depressed investor sentiment. 

2. We Believe The Most Likely Path Forward Is For The Economy to Devolve Into A Mild Recession

Prior to deep recessions, credit typically increases as banks extend credit to less credit-worthy borrowers. 

Then, when the economy experiences a tightening of monetary or fiscal policy, the effects are amplified by the large amount of credit present in the financial system.

Today, we have limited credit cycle vulnerabilities, indicated by:

These indicators suggest the recession will likely be moderate because the economy has not experienced the rapid build-up of credit that usually occurs before deep recessions.

3. Bitcoin Will Underperform Stocks Until A Recession Or Sovereign Debt Crisis Forces Central Banks To Pivot

We expect Bitcoin to struggle over the next few quarters until we find a bottom amidst the recession.

If stocks experience a drawdown of 24%, their median drawdown in a recession, Bitcoin will likely fall orders of magnitude further. 

Our 42 Macro Global Liquidity Proxy, measured by the aggregated sum of the global central bank balance sheets, global broad money supply, and global FX reserves minus gold, has been trending lower and will likely decline further over the medium term.

Still, we believe Bitcoin will trend significantly higher in the coming years. But we likely will not see a meteoric rise without a recession or significant problem in the sovereign debt markets that causes the stimulus to put Bitcoin on that path. 

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!

Stocks To Surge & Bonds To Sell Off Before Recession Hits By Early 2024

Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss inflation, the labor market, the probability of a recession, and much more.

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

1. A Resilient US economy Leads to A Resilient Labor Market

The labor market has remained relatively resilient:

Labor market conditions are likely to remain robust until the spring of next year. 
 

2. “Immaculate Disinflation” Will Give Way To “Sticky Inflation” In The Coming Months

We believe the Immaculate Disinflation that has occurred will likely run out in the coming months. Historically, the US economy has always required a recession to bring inflation back to a below-trend level.

Our HOPE+I framework looks at how unique baskets of indicators representing the housing, orders, production/profits, employment, and inflation cycles have historically behaved around recessions.

 

The framework shows that inflation typically breaks down 6 – 8 months after a recession starts.

There is no historical evidence to anticipate anything other than inflation exhibiting a similar pattern in this business cycle.

3. The Spread Between Labor Demand And Labor Supply Will Likely Remain Positive For Several Quarters

The most recent US Total Labor Force SA reading was 168 million people – a value below its 2009 to 2019 trendline. 

Conversely, Gross Domestic Income recovered its trendline approximately two years ago and remains above it. 

Looking at the spread between labor demand and labor supply, we found that labor demand outpaces labor supply by approximately 2.5 million workers. 

This spread will likely take a few quarters to return to zero and has sticky implications for workers’ bargaining power for their wages because the spread has historically been correlated to the annual change in the Private Sector Employment Cost Index.

 
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 is the Bond Market Signaling?

Darius recently sat down with Ash Bennington on Real Vision’s Daily Briefing to explore the bond market, inflation, FOMC, and more.

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

1. The Resilient US Economy Is Likely To Perpetuate The Bear Steepening in The Bond Market

The economy has been and will continue to be resilient for the following ten reasons:

We expect the resilient US economy theme will continue for the next three to six months and continue to perpetuate the bear steepening in the bond market.

2. We Challenge The Fed’s New Economic Projections 

This week’s FOMC meeting produced a “goldilocks” summary of economic projections:

With these projections, the Fed implicitly states that we will get more growth and better labor market conditions while still having a soft landing in inflation.

We disagree with the Fed’s view on this, as our research shows that inflation typically breaks down six to eight months into recession. 

3. Is 3% the new 2%?

Our secular inflation model indicates that we will have 50-100% more trend Core PCE inflation in this decade relative to the last decade. 

We track a basket of indicators correlated with the underlying trend of inflation that indicates the underlying trend is headed to 2.5% in this decade. 

Additionally, when you weigh the model on each indicator’s impact, the core PCE trend goes from 1.6% to 3.2%, equating to a 3.5% trend in headline CPI. 

Our models indicate that 3% may be the new 2% – both in terms of the trend in inflation and the Fed’s likely-to-be-revised inflation target. 

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!