TMC#17! In this article, I try to cut through the daily financial news noise to provide investors with the relevant info needed to enhance the risk/return profile of their portfolio in 2022.
Congratulations for this post. It is great to have you back. Maybe I am doing something wrong, but I think the links to the flatteners at the bottom don't work.
what do you think of the "cash" that sits on consumer b/s? this coupled with high inflation /bad delivery times during summer/fall could, at least in my mind, be a tailwind for -22 spending even with fiscal drag! Thoughts?
Hi Baloo! The private sector has decided to use the 2020-Q121 fiscal stimulus to deleverage (approx 30%) and save (approx another 30-35%). I don't think the decision to save was a short-term one.
Hello Alfonso. 2 Questions: Credit Impulse signal is indicating low level but shouldn't the Build Back Better and the Reconciliation Bill being discussed account for a spike in the Credit Impulse?. How do you see the $ behaving under such circumstances?
Hi Nino! Any form of net fiscal spending increases the credit impulse metric as long as this spending is accelerating from today's starting point. The BBB plan and reconciliation plan funds will be disbursed over time, hence contributing very very little to the G5 Credit Impulse as % of GDP in the short-term. But yes, they should show with in a modest uptick.
Amazing. Heard you on RV and it connected some dots for me. Read this and it's hard to see how it does not play out exactly as you say ... any ideas what quadrant we will be in in 2022?
a couple of points from me as well: on long term growth, we agree ondemographics,but often the other major factor, productivity, is forgotten.Yes we all agree that measuring productivity is very tough, but at least from a qualitative point of view I tend to believe that all the tech evolution and revolution, so well reflected in Nasdaq prices, must be helping productivity, and in the long run Growth potential as well.
Then, I guess the real battlefield is what terminal rate can the American economy sustain in this hiking cycle, and why the curve is flattening so aggressively even if terminal rate implied in the ED curve is only 1,75%, rather then the 2,5% of previous cycle , or even the much higher rates that some "economists" (sic) have been pointing at, for way too many years now..
We've had exponential technological progress over the last decade but signs of productivity pickup are still elusive. My theory is that the technological advances have affected still too little sectors of the global economy which is undergoing a slow but constant transition to more tech-intensive sectors.
My estimates for the equilibrium real interest rate in the US point to a range around 0% - trend inflation needs to be overlaid on that, of course.
It seems to me too that China and other Asian countries might be (in a shy way) restarting their engine - they used to account for a large portion of the credit impulse.
Too early to judge when and how much will that contribute.
Alf, this is a comment on bonds/NDQ, not flattener: I see your view on the 5s, but surely the FAANGs price off 30s? Where real yields may be sinking further - same issue for gold.
Hi Norman! Yes, in the medium term stocks (especially valuation intensive sectors like tech) care more about long-term real yields. But in the short-term, a rise in reals doesn't bode well for the entire asset class.
Hello Alfonso. Good to see you are back. Regarding real yields, I get the short term but I suppose long term could be more flattish. I thought stocks paid more attention to 10y than short term? If so, perhaps we can hope Nasdaq will continue upwards?
Hi Richard! Good question, and I ultimately agree with you. Nevertheless, rising real yields in the short-term don't bode particularly well for equities.
I'd appreciate a reply to Nick's second comment, I would think it'd be smart to do a look just at the US, considering much of global trade runs on eurodollars.
Smoothing credit growth out over the G5 would seem to mute projections of US equity growth quite a bit. But I wouldn't know. Thanks for the free material/forum.
Thanks for explaining. I only watch the US. How much influence do the other G 4 have on the US (dollar) economy? I would predict that as the US goes, so go the rest, and the US bank credit has a positive 2nd derivative at the moment. Thanks again.
Hi Mohit! I am in the process of developing a very simple ETF asset allocation investment strategy. It will be released in one of the next articles and updated every time I make an asset allocation change.
Hello Alfonso, and thank you for another great article!
I have two questions if I may:
1) The recent sharp raise in the short-end of the curve seems to have priced in, at least, 2 or 3 rates hikes in 2022 and another 3 or 4 hikes in 2023. I am not convinced that the Fed will be so aggressive in their attempt to normilize rates towards their 2% or 2.5% goal, as they'd probably be fearful to crash the markets in they get there too fast. For that reason, short term bonds seem like a good buy at this point, perhaps via SHY or similar instrument. What do you think?
2) Joe Manchin seems to be tanking Binden's BBB program, which further aligns with the overall slow credit impulse narrative. However, the Fed has initiated a tightening process: firstly slowing their asset purchases and later, so they say, raising rates progressively in 2022. Wouldnt that take use from Quad 1 to Quad 4 rather soon?
Thanks again for your amazing insights, and Merry Christmas!
1) I believe the front-end of the UST market is priced relatively well with 3 hikes priced for 2022 and 1-2 more for 2023. Actually, I think the Fed might even surprise on the upside and try to hike 4 times next year if market conditions allow.
2) The credit impulse is still slow, but it’s not aggressively deteriorating anymore (I will update it early next year). The tightening cycle is still at very early stages and it would leave real rates still below equilibrium rates in my model. Despite the direction of travel not being great, those are not Quad4/mayhem/run for the hills conditions.
Thank you very much for such prompt response Alfonso!
One further follow up to your response to point #2 if I may: you mention that despite the direction of travel not being great, the actual real rates would still remain low. I thought, perhaps incorrectly, that the Quad Compass model was to be interpreted or acted upon in terms of "direction of travel" rather than "are we there yet?".
Did I perhaps misunderstand how to read/apply the Quad model? Are the absolute numbers more important than the direccion or accelleration?
Hi Alfonso,
Congratulations for this post. It is great to have you back. Maybe I am doing something wrong, but I think the links to the flatteners at the bottom don't work.
I wish a Merry Christmas.
Thank you
It should send you here: https://themacrocompass.substack.com/p/the-reflationary-trade-is-dead-in
what do you think of the "cash" that sits on consumer b/s? this coupled with high inflation /bad delivery times during summer/fall could, at least in my mind, be a tailwind for -22 spending even with fiscal drag! Thoughts?
Hi Baloo! The private sector has decided to use the 2020-Q121 fiscal stimulus to deleverage (approx 30%) and save (approx another 30-35%). I don't think the decision to save was a short-term one.
Those jobs better catch up then!
Hello Alfonso. 2 Questions: Credit Impulse signal is indicating low level but shouldn't the Build Back Better and the Reconciliation Bill being discussed account for a spike in the Credit Impulse?. How do you see the $ behaving under such circumstances?
Hi Nino! Any form of net fiscal spending increases the credit impulse metric as long as this spending is accelerating from today's starting point. The BBB plan and reconciliation plan funds will be disbursed over time, hence contributing very very little to the G5 Credit Impulse as % of GDP in the short-term. But yes, they should show with in a modest uptick.
Alfonso, great analysis. Curious why you use FAAMG instead of a broader index in your chart like SPX or wilshire?
Just because the FAAMG is the most valuation intensive sector of the stock market.
Amazing. Heard you on RV and it connected some dots for me. Read this and it's hard to see how it does not play out exactly as you say ... any ideas what quadrant we will be in in 2022?
Thanks! I will update it as I see changes happening, for now it’s Quadrant 1 still.
Welcome back,
a couple of points from me as well: on long term growth, we agree ondemographics,but often the other major factor, productivity, is forgotten.Yes we all agree that measuring productivity is very tough, but at least from a qualitative point of view I tend to believe that all the tech evolution and revolution, so well reflected in Nasdaq prices, must be helping productivity, and in the long run Growth potential as well.
Then, I guess the real battlefield is what terminal rate can the American economy sustain in this hiking cycle, and why the curve is flattening so aggressively even if terminal rate implied in the ED curve is only 1,75%, rather then the 2,5% of previous cycle , or even the much higher rates that some "economists" (sic) have been pointing at, for way too many years now..
We've had exponential technological progress over the last decade but signs of productivity pickup are still elusive. My theory is that the technological advances have affected still too little sectors of the global economy which is undergoing a slow but constant transition to more tech-intensive sectors.
My estimates for the equilibrium real interest rate in the US point to a range around 0% - trend inflation needs to be overlaid on that, of course.
Alf,
1) Please share source for Households' real income chart. I see it for all other charts.
2) It appears that China credit impulse is set to rise, what % of China contributes to your G5 credit impulse? https://twitter.com/BittelJulien/status/1468127432058322945?s=20
The source for that chart is Bloomberg again.
It seems to me too that China and other Asian countries might be (in a shy way) restarting their engine - they used to account for a large portion of the credit impulse.
Too early to judge when and how much will that contribute.
Welcome back Alfonso. Have you an opinion on which Quadrant from Global Credit Impulse chart we might be heading into for Q1 22 ?- Would it be Q3
My base case is still Quadrant 1.
Sir u speak ur heart...its awesome learning and evolving and never a question of right or wrong..
Thank you, this means a lot!
Alf, this is a comment on bonds/NDQ, not flattener: I see your view on the 5s, but surely the FAANGs price off 30s? Where real yields may be sinking further - same issue for gold.
Hi Norman! Yes, in the medium term stocks (especially valuation intensive sectors like tech) care more about long-term real yields. But in the short-term, a rise in reals doesn't bode well for the entire asset class.
Alf- Great substack, followed from your segment on RV earlier today. Are you from Salerno?
Yes, John! Precisely from Battipaglia, a small city famous for its outstanding mozzarella!
I have been to Battipaglia. My father is from Cava de Tirreni, we have a lot of friends and family there.
Greeting Alfonso,
Likewise...it's great to see you back! Thank you so much for your update!
Thank you, Carl!
Hello Alfonso. Good to see you are back. Regarding real yields, I get the short term but I suppose long term could be more flattish. I thought stocks paid more attention to 10y than short term? If so, perhaps we can hope Nasdaq will continue upwards?
Hi Richard! Good question, and I ultimately agree with you. Nevertheless, rising real yields in the short-term don't bode particularly well for equities.
You state that the credit creation is slowing, but that is not what the US aggregate bank credit is showing. It is growing...a lot.
Hi Nick. I am in the process of updating my G5 Credit Impulse as % of GDP. Please notice it's not only about the US, but about the G5 countries.
And also please notice it's about the pace of growth (acceleration), not the growth itself.
I'd appreciate a reply to Nick's second comment, I would think it'd be smart to do a look just at the US, considering much of global trade runs on eurodollars.
Smoothing credit growth out over the G5 would seem to mute projections of US equity growth quite a bit. But I wouldn't know. Thanks for the free material/forum.
Alf- Do you factor reserve requirements ( or lack of, lol ) into your analysis?
Thanks for explaining. I only watch the US. How much influence do the other G 4 have on the US (dollar) economy? I would predict that as the US goes, so go the rest, and the US bank credit has a positive 2nd derivative at the moment. Thanks again.
Thank you for all the information. Im
New this newsletter and was wondering how would you suggest to change/use your investment strategy in our common 401(k) Roth IRAs account?
Hi Mohit! I am in the process of developing a very simple ETF asset allocation investment strategy. It will be released in one of the next articles and updated every time I make an asset allocation change.
Always remember this is not investment advice.
Hello Alfonso, and thank you for another great article!
I have two questions if I may:
1) The recent sharp raise in the short-end of the curve seems to have priced in, at least, 2 or 3 rates hikes in 2022 and another 3 or 4 hikes in 2023. I am not convinced that the Fed will be so aggressive in their attempt to normilize rates towards their 2% or 2.5% goal, as they'd probably be fearful to crash the markets in they get there too fast. For that reason, short term bonds seem like a good buy at this point, perhaps via SHY or similar instrument. What do you think?
2) Joe Manchin seems to be tanking Binden's BBB program, which further aligns with the overall slow credit impulse narrative. However, the Fed has initiated a tightening process: firstly slowing their asset purchases and later, so they say, raising rates progressively in 2022. Wouldnt that take use from Quad 1 to Quad 4 rather soon?
Thanks again for your amazing insights, and Merry Christmas!
Hi Hector! Great questions.
1) I believe the front-end of the UST market is priced relatively well with 3 hikes priced for 2022 and 1-2 more for 2023. Actually, I think the Fed might even surprise on the upside and try to hike 4 times next year if market conditions allow.
2) The credit impulse is still slow, but it’s not aggressively deteriorating anymore (I will update it early next year). The tightening cycle is still at very early stages and it would leave real rates still below equilibrium rates in my model. Despite the direction of travel not being great, those are not Quad4/mayhem/run for the hills conditions.
Thank you very much for such prompt response Alfonso!
One further follow up to your response to point #2 if I may: you mention that despite the direction of travel not being great, the actual real rates would still remain low. I thought, perhaps incorrectly, that the Quad Compass model was to be interpreted or acted upon in terms of "direction of travel" rather than "are we there yet?".
Did I perhaps misunderstand how to read/apply the Quad model? Are the absolute numbers more important than the direccion or accelleration?
Thank you SO very much again!
Both are equally important, Hector.
The Compass should be interpreted as a tool to inform you on what's the broad asset allocation one should lean on given where we sit in the cycle.