TMC#18! 2022 looks a lot like summer 2018: portfolio returns adjusted for inflation are likely to be poor across the board but few investments might still work.
Hi Alf, your analogy to 2018 could indeed be a real scenario, I agree. But somehow only the second half of 2022 ? The economy still appears strong enough (structurally, with pent-up demand etc.) to be able to absorb a large part of the tightening in my view. Structurally, the US household, corporate and banking sector are all strong. That suggests an ability for the economy to absorb higher interest rates. If correct, then real bond yields (and indeed much of the interest rate structure) should move higher which, given those high stand-alone valuations, at some point (2H 2022?), will create significant challenges for the stock market.
Hi Thomas! Yes indeed, my analogy is with SUMMER 2018 and not with the tricky Q42018 period. I also believe real yields can gently move up a bit from here.
Awesome read and great interview on Real Vision recently Alf! You should also note that the Eurodollars futures curves inverted (currently!) and they also did so in 2018. The Eurodollar system is clearing pricing in deflation/disinflation/risk off which is consistent with your Macro Compass take on the global credit impulse (what I call BOMD = Bank Originated Money and Debt).
Absolutely! I don't place a trade unless I know and understand the macro/fundamental backdrop though, regardless of technicals. Cheers to you my friend!
Yelian, Could I ask you how do you see or calculate the Eurodollars futures curves? And why is it important to consider ? Thanks a lot for your thoughts
I'm happy to opine! Eurodollar futures (underlying asset = 3m USD LIBOR deposits) have their prices posted on any platform (Tradingview as these are Futures and not Forwards and thus they are exchange traded). Unless you trade these instruments you really don't need to know much more than that however, I strongly suggest you follow the work of Jeff Snider who is easily the most astute analyst and student of the Eurodollar market. When you think "Eurodollar" think "the actual global reserve currency and the actual" or "the actual effective global money supply". If you follow Jeff Snider you will always be up to date as to what the Eurodollar system is saying or currently pricing in. Remember that liquid, freely traded markets are humanity's way of imposing thermodynamic thresholds on the random walk that are asset prices and thus the probability distribution of future outcomes is buried in or priced into the statistical behavior of those markets. As of right now that largest markets in the world (ED, sovereign debt and the broader interest rate markets) are ALL pricing in a DISINFLATION/DEFLATION/another decade of "Japanification" for DM economies and I would say that the front end of the curves are pricing in the Fed and global CB's instigating a rate hike cycle/tightening that leads nowhere except to the disinflationary outcomes that the long end of the curves have clearly priced in. Again, I can't recommend Jeff Snider highly enough if you want to understand the true global monetary system, i.e.. the one NOT controlled in any way, shape or form by CB's but is certainly able to react and price in the market's assessment as to the probability distribution of future outcomes
Thanks for the reply, it's much appreciated. I still don't get it very much :) I mean how to look at the EURODOLLAR to understand the probability distribution of future outcomes. But I'll start studying the resources from Jeff Snider. Thanks for your suggestions ;)
Well it depends on how far the rabbit hole you want to go which depends on 1) your willingness and 2) your ability. I have the econometric chops but I prefer to deploy that human capital elsewhere so I rely on excellent fundamental analysts who also have my econometric chops and then some (Alf, Jeff Snider, Luke Gromen, Lyn Alden etc.) I pay attention to fundamentals but I'm a technical trader/analyst. Also, keep in mind that while you may rely on your OWN estimate of the UNOBSERVABLE probability distribution of future outcomes you are likely better off relying on the market implied estimate (i.e. as great as your econometric chops and models might be, they are likely NOT to be superior to the market estimate as you can never know more than the market generally speaking). So basically the market can do the work for you if you let it and if you listen to it or follow those who have fine tuned their hearing vis-a-vis these various fixed income markets (fixed income market signals having an empirically superior signal-to-noise ratio when compared to any other market, especially the equity markets)
Hi Alf, Great read as always. Now that we know what you think of inflation, I was wondering how the different directions of the ECB and the FED in combination with the inflation will affect the equity markets (US vs European) and the balance of portfolios.
Hi Morre! I guess the ECB and Fed direction is going to be similar: try to ''gently'' remove accommodation into 2022. The Fed is priced to do that less gently than the ECB, and that's also why EUR/USD is underperforming. In that environment, I'd personally prefer exposure to US equities if I was forced to have any.
I expect reactionary politics to dictate policy for the "independent" FED up against inflation and then a quick a significant reversal once markets have sent a clearer enough message.
Timing is always tricky but hedging against long term investments and cash is a reasonable play despite the premium paid to hold in the interim. Suspect the opportunity to pick up quality shares will significantly offset the interim hold.
Risk / reward equation seems highly geared for that probability given the FEDs recent turnabout, the orchestrated political narrative to support the need to appear to be doing something as we head into the mid terms and the significantly out in front of its ski's market.
Hi Alf, new subscriber and excited to be here. If you have a premium newsletter please let me know. A question I have is why are you leaving out the Dec '18 episode? At that time i was hoarding cash given the macro and it turned out very good for me when I could jump back in as the rebound started by end of the month. I'm starting to do the same now given the similar macro, but with the mid term elections (US) I question if the Fed is going to be all talk and no action this time.
Glad to see you back Alfonso, My email did not notify me of your return another blog notified me. Since your article the big 8 tech stocks are down 5% or more. In 2018 it took a year for the big 8 to recover. Looks like it's time to rotate into other assets but nothing seems to working right now. Energy is up last month but got hammered latley. In 2018 TLT and GLD seemed to work not sure if that is going to work this time. If your correct what is going to work? I don't like shorting would rather hold cash. Sorry if I missed this.
Hi Mark! Have you checked whether the email ended up in the spam or promotions folder?
If I am correct, not much it's going to work - I am long USD cash, secular stocks (tech) and low-beta sectors (e.g. utilities, staples) but those are rather defensive places where to hide than assets which are going to generate large returns.
Great, thoughtful post. I see similarities, and a 3x taper will reward flatteners, ergo the long end. If the Fed raises rates 3 times in 2022 the long end won't be spared a beating, as you say. Maybe one rate hike is coming, but 3 would create big trouble in China and avalanche from there. Can't see the Fed on board for that an won't repeat a mistake.
Alf, of course I enjoy your economic analysis. Without using too many macro technical tools you make forecast points and then suggest asset categories fitting the forecast. My comment (suggestion really) has to do with the format. Another substack account to which I subscribe (Matt Taibbi) publishes his articles and then later releases an audio of his article being read. This allows me to "read" his pieces while walking for exercise or driving (I am an owner-operator, OTC trucker. Lots of time spent driving.) Of course you have charts and that would require a little more thought in publishing an audio version of your article, but I've heard you speak and believe you can make your points verbally. Just a suggestion to improve the subscriber experience. Best of luck with the rejuvinated Macro Compass.
Thank you for your feedback, Woody. Very valuable!
I actually had published today's article with an audio version attached to it too, and then in the end decided to remove it. I will make sure I include an audio version too next time!
Hi Alf, your analogy to 2018 could indeed be a real scenario, I agree. But somehow only the second half of 2022 ? The economy still appears strong enough (structurally, with pent-up demand etc.) to be able to absorb a large part of the tightening in my view. Structurally, the US household, corporate and banking sector are all strong. That suggests an ability for the economy to absorb higher interest rates. If correct, then real bond yields (and indeed much of the interest rate structure) should move higher which, given those high stand-alone valuations, at some point (2H 2022?), will create significant challenges for the stock market.
Hi Thomas! Yes indeed, my analogy is with SUMMER 2018 and not with the tricky Q42018 period. I also believe real yields can gently move up a bit from here.
Awesome read and great interview on Real Vision recently Alf! You should also note that the Eurodollars futures curves inverted (currently!) and they also did so in 2018. The Eurodollar system is clearing pricing in deflation/disinflation/risk off which is consistent with your Macro Compass take on the global credit impulse (what I call BOMD = Bank Originated Money and Debt).
Indeed, Yelian. The bond market is speaking pretty clearly here, and we should listen!
Absolutely! I don't place a trade unless I know and understand the macro/fundamental backdrop though, regardless of technicals. Cheers to you my friend!
Yelian, Could I ask you how do you see or calculate the Eurodollars futures curves? And why is it important to consider ? Thanks a lot for your thoughts
I'm happy to opine! Eurodollar futures (underlying asset = 3m USD LIBOR deposits) have their prices posted on any platform (Tradingview as these are Futures and not Forwards and thus they are exchange traded). Unless you trade these instruments you really don't need to know much more than that however, I strongly suggest you follow the work of Jeff Snider who is easily the most astute analyst and student of the Eurodollar market. When you think "Eurodollar" think "the actual global reserve currency and the actual" or "the actual effective global money supply". If you follow Jeff Snider you will always be up to date as to what the Eurodollar system is saying or currently pricing in. Remember that liquid, freely traded markets are humanity's way of imposing thermodynamic thresholds on the random walk that are asset prices and thus the probability distribution of future outcomes is buried in or priced into the statistical behavior of those markets. As of right now that largest markets in the world (ED, sovereign debt and the broader interest rate markets) are ALL pricing in a DISINFLATION/DEFLATION/another decade of "Japanification" for DM economies and I would say that the front end of the curves are pricing in the Fed and global CB's instigating a rate hike cycle/tightening that leads nowhere except to the disinflationary outcomes that the long end of the curves have clearly priced in. Again, I can't recommend Jeff Snider highly enough if you want to understand the true global monetary system, i.e.. the one NOT controlled in any way, shape or form by CB's but is certainly able to react and price in the market's assessment as to the probability distribution of future outcomes
Thanks for the reply, it's much appreciated. I still don't get it very much :) I mean how to look at the EURODOLLAR to understand the probability distribution of future outcomes. But I'll start studying the resources from Jeff Snider. Thanks for your suggestions ;)
Well it depends on how far the rabbit hole you want to go which depends on 1) your willingness and 2) your ability. I have the econometric chops but I prefer to deploy that human capital elsewhere so I rely on excellent fundamental analysts who also have my econometric chops and then some (Alf, Jeff Snider, Luke Gromen, Lyn Alden etc.) I pay attention to fundamentals but I'm a technical trader/analyst. Also, keep in mind that while you may rely on your OWN estimate of the UNOBSERVABLE probability distribution of future outcomes you are likely better off relying on the market implied estimate (i.e. as great as your econometric chops and models might be, they are likely NOT to be superior to the market estimate as you can never know more than the market generally speaking). So basically the market can do the work for you if you let it and if you listen to it or follow those who have fine tuned their hearing vis-a-vis these various fixed income markets (fixed income market signals having an empirically superior signal-to-noise ratio when compared to any other market, especially the equity markets)
Hi Alf, Great read as always. Now that we know what you think of inflation, I was wondering how the different directions of the ECB and the FED in combination with the inflation will affect the equity markets (US vs European) and the balance of portfolios.
Thanks
Hi Morre! I guess the ECB and Fed direction is going to be similar: try to ''gently'' remove accommodation into 2022. The Fed is priced to do that less gently than the ECB, and that's also why EUR/USD is underperforming. In that environment, I'd personally prefer exposure to US equities if I was forced to have any.
Hi Alf, thank you for your feedback. And great video on RV today. All the best
Enjoyable read as usual Alfonso. Thanks!
I expect reactionary politics to dictate policy for the "independent" FED up against inflation and then a quick a significant reversal once markets have sent a clearer enough message.
Timing is always tricky but hedging against long term investments and cash is a reasonable play despite the premium paid to hold in the interim. Suspect the opportunity to pick up quality shares will significantly offset the interim hold.
Risk / reward equation seems highly geared for that probability given the FEDs recent turnabout, the orchestrated political narrative to support the need to appear to be doing something as we head into the mid terms and the significantly out in front of its ski's market.
Quite a good summary of things, Riki!
Hi Alf, new subscriber and excited to be here. If you have a premium newsletter please let me know. A question I have is why are you leaving out the Dec '18 episode? At that time i was hoarding cash given the macro and it turned out very good for me when I could jump back in as the rebound started by end of the month. I'm starting to do the same now given the similar macro, but with the mid term elections (US) I question if the Fed is going to be all talk and no action this time.
Glad to see you back Alfonso, My email did not notify me of your return another blog notified me. Since your article the big 8 tech stocks are down 5% or more. In 2018 it took a year for the big 8 to recover. Looks like it's time to rotate into other assets but nothing seems to working right now. Energy is up last month but got hammered latley. In 2018 TLT and GLD seemed to work not sure if that is going to work this time. If your correct what is going to work? I don't like shorting would rather hold cash. Sorry if I missed this.
Cheers,
MV
Hi Mark! Have you checked whether the email ended up in the spam or promotions folder?
If I am correct, not much it's going to work - I am long USD cash, secular stocks (tech) and low-beta sectors (e.g. utilities, staples) but those are rather defensive places where to hide than assets which are going to generate large returns.
I am short Russell, EM, Tips, Gold and Bitcoin.
Thank you Alf.
Great, thoughtful post. I see similarities, and a 3x taper will reward flatteners, ergo the long end. If the Fed raises rates 3 times in 2022 the long end won't be spared a beating, as you say. Maybe one rate hike is coming, but 3 would create big trouble in China and avalanche from there. Can't see the Fed on board for that an won't repeat a mistake.
Alf, of course I enjoy your economic analysis. Without using too many macro technical tools you make forecast points and then suggest asset categories fitting the forecast. My comment (suggestion really) has to do with the format. Another substack account to which I subscribe (Matt Taibbi) publishes his articles and then later releases an audio of his article being read. This allows me to "read" his pieces while walking for exercise or driving (I am an owner-operator, OTC trucker. Lots of time spent driving.) Of course you have charts and that would require a little more thought in publishing an audio version of your article, but I've heard you speak and believe you can make your points verbally. Just a suggestion to improve the subscriber experience. Best of luck with the rejuvinated Macro Compass.
Thank you for your feedback, Woody. Very valuable!
I actually had published today's article with an audio version attached to it too, and then in the end decided to remove it. I will make sure I include an audio version too next time!