TMC #2! The Macro Compass uses prop indicators for global credit impulse and changes in monetary policy stance to predict asset returns. It's now sending you a clear message.
If i remember correctly, it wasn't until March 10, 2020 then the market suddenly shifted to the bottom left according to your compass. Before that, from late Jan 2020 to March 9, the market has been stay in risk off sentiment at the top left?
We could see it very clearly via long-term Treasury price
Yes, they are one of the most important macro drivers to look at together with real rates. Could be the signal is already here? Everybody shouting about inflation and Fed explicitly ''behind the curve''...and 30y bonds below 2.5% and not going anywhere? Maybe that's already a signal.
I struggle to understand why rate of change is so important. It is easy to understand how going from net credit growth (say) to net contraction will move you quadrants. But if credit growth goes from (say) very strong to just strong, I wouldn't have expected that to fundamentally change things. Is this relationship just empirical or is there a theoretical explanation why continued movement in one direction, albeit at a slower rate, changes the asset classes that are expected to do best/worst?
I recently discovered your Macro Tradefloor podcast and I absolutely love it. Good interviews, fantastic that everything is focused on a trade idea and what can go wrong. Not many podcasts that focus on actual trade ideas. Is it possible that in one of your sub stack articles you go more into depth regarding trades, technicals, why you enter, at what level you enter, at what level you get out or take profit (levels or fundamentals changing)? Does it have to do with indicators, support and resistance, pivot price levels, etc. When to time your entry. I found a post of yours this week where you share an excel overview with all your trades and that info is of invaluable value to me, to see the trading approach with entry and P/L levels and the chart action from a macro point of view, rather than only the fundamentals and logic for a trade. The numbers. You think that could be a part of your substack scope? Take us in a full extend through one trade hypothesis, entry, exit?
How do I decide about the trade: sizing, entry, exit, how does it interact with other positions etc so you guys can follow my thinking on portfolio management too
Hi Alfonso! i very much love and apprewhat you’re writing. Though on this piece, its a bit brief to be understandable, could you please disclose your credit impulse model further?
Would be really interested to understand the working of the credit impulse better and back test it on post world war II data. Do you use flows or credit spreads?
Grazie mille per il tuo lavoro: il video e l'articolo della Bank of England mi hanno aiutato moltissimo nel capire il meccanismo del QE, per me che non sono laureato in economia!
Excellent compass. I listened to you explain it on a podcast and I wanted to dive into your substack to get a better understanding.
Does the Senior Loan Officer Survey (https://fred.stlouisfed.org/categories/32239) from FRED offer any insight into how US banks are approaching easing and tightening credit availability? This seems to help to understand the monetary policy of the banks actually putting money into the system.
For instance, the link is to the April 1, 2021 senior loan officer sentiment report. If you look at FED G-19 Release Date*: July 8, 2021 report you find that the consumer credit Total percent change (annual rate) went from 5.7 in April 2021 to 10.0 in May 2021.
The surveys include:
1) Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms
2) Net Percentage of Domestic Banks Tightening Standards on Consumer Loans, Credit Cards
3) Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Small Firms
4) Net Percentage of Domestic Banks Tightening Standards for Subprime Mortgage Loans
5) Net Percentage of Domestic Banks Tightening Standards for Auto Loans
6) Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans with Construction and Land Development Purposes
7) Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans Secured by Multifamily Residential Structures
8) Net Percentage of Domestic Banks Tightening Standards for Consumer Loans Excluding Credit Card and Auto Loans
9) Net Percentage of Domestic Banks Tightening Standards for Government Mortgage Loans
10) Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans Secured by Nonfarm Nonresidential Structures
11) Net Percentage of Domestic Banks Tightening Standards for GSE-Eligible Mortgage Loans
12) Net Percentage of Domestic Banks Tightening Standards for Qualified Mortgage Jumbo Mortgage Loans
13) Net Percentage of Domestic Banks Tightening Standards for Non-Qualified Mortgage Non-Jumbo Mortgage Loans
14) Net Percentage of Domestic Banks Tightening Standards for Non-Qualified Mortgage Jumbo Mortgage Loans
15) Net Percentage of Domestic Banks Tightening Standards for Qualified Mortgage Non-Jumbo, Non-GSE-Eligible Mortgage Loans
The Loan Officer Survey is a great way to understand if banks are tightening or easing their lending standards, but it does not tell you exactly if they are expanding or contracting their loan books and at which pace.
Credit impulse peaked in Q420, plateaued for few months and started dropping in April 2021. It leads GDP and asset classes returns with a 8-12m lag. Some of the high beta stuff out there (industrial commodities, some EM etc) already retracing in June 2021 (Q420 + 8-9m lag, very punctual).
Without revealing any proprietary info, would you be able to recommend any resources or have any advice for someone looking to build a credit impulse tool from scratch?
If i remember correctly, it wasn't until March 10, 2020 then the market suddenly shifted to the bottom left according to your compass. Before that, from late Jan 2020 to March 9, the market has been stay in risk off sentiment at the top left?
We could see it very clearly via long-term Treasury price
Exact timing is impossible. Still called The Macro Compass and not The Crystal Ball :)
Awesome post
Good stuff! But the transition will take a lot of time, imho. Guess 30yr bonds will give you an excellent signal at some stage.
Yes, they are one of the most important macro drivers to look at together with real rates. Could be the signal is already here? Everybody shouting about inflation and Fed explicitly ''behind the curve''...and 30y bonds below 2.5% and not going anywhere? Maybe that's already a signal.
I struggle to understand why rate of change is so important. It is easy to understand how going from net credit growth (say) to net contraction will move you quadrants. But if credit growth goes from (say) very strong to just strong, I wouldn't have expected that to fundamentally change things. Is this relationship just empirical or is there a theoretical explanation why continued movement in one direction, albeit at a slower rate, changes the asset classes that are expected to do best/worst?
1 year late. This is gold.
Probably the best piece of information I've ever read on the Internet.
I can't thank you enough.
Beautiful to see this post a year later and see that flashing watch out warning on spx returns! Well done.
The SPX returned roughly -20% in real terms from June 2021 (when I wrote this article) to June 2022.
Indeed The Macro Compass worked well in this case.
I recently discovered your Macro Tradefloor podcast and I absolutely love it. Good interviews, fantastic that everything is focused on a trade idea and what can go wrong. Not many podcasts that focus on actual trade ideas. Is it possible that in one of your sub stack articles you go more into depth regarding trades, technicals, why you enter, at what level you enter, at what level you get out or take profit (levels or fundamentals changing)? Does it have to do with indicators, support and resistance, pivot price levels, etc. When to time your entry. I found a post of yours this week where you share an excel overview with all your trades and that info is of invaluable value to me, to see the trading approach with entry and P/L levels and the chart action from a macro point of view, rather than only the fundamentals and logic for a trade. The numbers. You think that could be a part of your substack scope? Take us in a full extend through one trade hypothesis, entry, exit?
Great idea.
One article should be: new trade long xyz
How do I decide about the trade: sizing, entry, exit, how does it interact with other positions etc so you guys can follow my thinking on portfolio management too
Exactly, that would be amazing! Appreciated Alf.
Hi Alfonso! i very much love and apprewhat you’re writing. Though on this piece, its a bit brief to be understandable, could you please disclose your credit impulse model further?
great post
Would be really interested to understand the working of the credit impulse better and back test it on post world war II data. Do you use flows or credit spreads?
Thank you for a great article. Your quad model is similar to Keith McCullough’s. You should interview him or he should interview you.
I would suggest more Darius Dale (ex Hedgeye). Keith is great but his Macro views are not as good as Darius in my opinion.
Grazie mille per il tuo lavoro: il video e l'articolo della Bank of England mi hanno aiutato moltissimo nel capire il meccanismo del QE, per me che non sono laureato in economia!
Ottimo, questo mi rende felice!
Alfonso,
Excellent compass. I listened to you explain it on a podcast and I wanted to dive into your substack to get a better understanding.
Does the Senior Loan Officer Survey (https://fred.stlouisfed.org/categories/32239) from FRED offer any insight into how US banks are approaching easing and tightening credit availability? This seems to help to understand the monetary policy of the banks actually putting money into the system.
For instance, the link is to the April 1, 2021 senior loan officer sentiment report. If you look at FED G-19 Release Date*: July 8, 2021 report you find that the consumer credit Total percent change (annual rate) went from 5.7 in April 2021 to 10.0 in May 2021.
The surveys include:
1) Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms
2) Net Percentage of Domestic Banks Tightening Standards on Consumer Loans, Credit Cards
3) Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Small Firms
4) Net Percentage of Domestic Banks Tightening Standards for Subprime Mortgage Loans
5) Net Percentage of Domestic Banks Tightening Standards for Auto Loans
6) Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans with Construction and Land Development Purposes
7) Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans Secured by Multifamily Residential Structures
8) Net Percentage of Domestic Banks Tightening Standards for Consumer Loans Excluding Credit Card and Auto Loans
9) Net Percentage of Domestic Banks Tightening Standards for Government Mortgage Loans
10) Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans Secured by Nonfarm Nonresidential Structures
11) Net Percentage of Domestic Banks Tightening Standards for GSE-Eligible Mortgage Loans
12) Net Percentage of Domestic Banks Tightening Standards for Qualified Mortgage Jumbo Mortgage Loans
13) Net Percentage of Domestic Banks Tightening Standards for Non-Qualified Mortgage Non-Jumbo Mortgage Loans
14) Net Percentage of Domestic Banks Tightening Standards for Non-Qualified Mortgage Jumbo Mortgage Loans
15) Net Percentage of Domestic Banks Tightening Standards for Qualified Mortgage Non-Jumbo, Non-GSE-Eligible Mortgage Loans
Hi Joe, thanks for the nice words.
The Loan Officer Survey is a great way to understand if banks are tightening or easing their lending standards, but it does not tell you exactly if they are expanding or contracting their loan books and at which pace.
Thank for very very clear explanation. I have these concept in my mind before, but to me they're vague and no linkage as you do with the compass.
How would we judge the current stage, pace of global credit expansion/contraction?
Credit impulse peaked in Q420, plateaued for few months and started dropping in April 2021. It leads GDP and asset classes returns with a 8-12m lag. Some of the high beta stuff out there (industrial commodities, some EM etc) already retracing in June 2021 (Q420 + 8-9m lag, very punctual).
Yes. Thank you. What should i look at in order to see it? Change in bank loan, money supply?
Rate of change of bank loans is a good place where to start, but the Credit Impulse also looks at the other metrics.
Without revealing any proprietary info, would you be able to recommend any resources or have any advice for someone looking to build a credit impulse tool from scratch?
Hi Johnny! That's a bit like asking for the secret sauce at your preferred restaurant :)
Lol. It was worth a shot!
Hi Michael!
Credit impulse: pace of growth of the type of money the real economic actors (non-financial private sector) can spend
Relative monpol stance: measures the relative (real) cost of money against neutral and the rate of change around this level.