Macroeconomic and Investing, The Macro Compass

Alfonso Peccatiello (Alf)

Macroeconomic and Investing

The Macro Compass

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<ul><li>The first 5 weeks of the year have seen international equities outperforming the S&amp;P 500: European and Chinese stocks have rallied harder than US stock indexes, and certain emerging markets like Chile or Poland are doing even better.</li><li>My main thesis for the first half of the year remains to be positioned with an ‘’International Risk Parity’’ portfolio: long US bonds, and long stocks around the world.</li><li>The chart above shows that the US growth exceptionalism might be over. The Aggregate Income Growth series is a great proxy for nominal growth in real time: it includes private sector job creation, workweek hours, and wage growth – effectively reflecting the growth rate of nominal income US workers are bringing home.</li></ul>

The first 5 weeks of the year have seen international equities outperforming the S&amp;P 500: European and Chinese stocks have rallied harder than US stock indexes, and certain emerging markets like Chile or Poland are doing even better.My main thesis for the first half of the year remains to be positioned with an ‘’International Risk Parity’’ portfolio: long US bonds, and long stocks around the world.The chart above shows that the US growth exceptionalism might be over. The Aggregate Income Growth series is a great proxy for nominal growth in real time: it includes private sector job creation, workweek hours, and wage growth – effectively reflecting the growth rate of nominal income US workers are bringing home.

<ul><li>''Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.''</li><li>With this sentence, the Fed announced the tapering of their QT program last week.</li><li>The Federal Reserve has been running QT (Quantitative Tightening) since mid-2022: this process is aimed at unwinding the multi-trillion Fed bond holdings accumulated during previous QE episodes</li></ul>

''Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.''With this sentence, the Fed announced the tapering of their QT program last week.The Federal Reserve has been running QT (Quantitative Tightening) since mid-2022: this process is aimed at unwinding the multi-trillion Fed bond holdings accumulated during previous QE episodes

<ul><li>Keynes once said that markets can stay irrational longer than you can stay solvent.</li><li>I love this quote because it speaks about the power of narratives, and my own humble readaption of that would be:‘‘Narratives can dominate macro longer than you can remain solvent’’.</li><li>This is why today we are going to cover the two strongest narratives out there: China is doomed; AI is the new revolution and US tech will dominate forever.</li></ul>

Keynes once said that markets can stay irrational longer than you can stay solvent.I love this quote because it speaks about the power of narratives, and my own humble readaption of that would be:‘‘Narratives can dominate macro longer than you can remain solvent’’.This is why today we are going to cover the two strongest narratives out there: China is doomed; AI is the new revolution and US tech will dominate forever.

<ul><li>The Fed has been running QT for a while and yet there is still abundant liquidity in the financial system.</li><li>Fed’s bond holdings are down $1.3 trillion from their peak (due to QT), yet only half of this supposed tightening has actually impacted bank reserves (aka ‘’liquidity’’) which are down a meagre $0.7 trillion.</li><li>This ongoing ‘’money mystery’’ has caught many off-guard, and it has helped fuel several bullish narratives: the most famous one being that higher ‘’liquidity’’ has supported stock markets in 2023.</li></ul>

The Fed has been running QT for a while and yet there is still abundant liquidity in the financial system.Fed’s bond holdings are down $1.3 trillion from their peak (due to QT), yet only half of this supposed tightening has actually impacted bank reserves (aka ‘’liquidity’’) which are down a meagre $0.7 trillion.This ongoing ‘’money mystery’’ has caught many off-guard, and it has helped fuel several bullish narratives: the most famous one being that higher ‘’liquidity’’ has supported stock markets in 2023.

<ul><li>Are we back in 2011 or what? After the US debt ceiling drama earlier this year we just witnessed a rating agency downgrading the US exactly like in 2011 – back then S&amp;P, this time Fitch.</li><li>Today you are likely to read plenty of scary and fear-mongering headlines.</li><li>In this piece instead we’ll take a step back and rationally assess what the US downgrade means for investors and markets out there.</li></ul>

Are we back in 2011 or what? After the US debt ceiling drama earlier this year we just witnessed a rating agency downgrading the US exactly like in 2011 – back then S&amp;P, this time Fitch.Today you are likely to read plenty of scary and fear-mongering headlines.In this piece instead we’ll take a step back and rationally assess what the US downgrade means for investors and markets out there.

Former head of a $20 bn Investment Portfolio and passionate global macro investor. I write The Macro Compass, a financial newsletter providing actionable investment ideas & unique macroeconomic insights to enhance the risk/return of your portfolio