Macroeconomic and Investing, The Macro Compass

Alfonso Peccatiello (Alf)

Macroeconomic and Investing

The Macro Compass

Actionable investment ideas and unique global macro insights. From the desk of a former Head of $20 bn Investment Portfolio straight to your inbox.

Actionable Investment Ideas

Macroeconomics

<ul>
<li>The main point behind the Financial Instability Hypothesis developed by Minsky was that artificial stability and low volatility generate complacency amongst economic agents and ultimately lead to suboptimal decisions: the seeds of the next crisis are sown in the good time.</li>
<li>Once economic agents are confident nothing can ever go wrong, borrowing happens on more and more relaxed terms until anybody qualifies for leverage without credible possibilities to produce enough cash flows to service their liabilities.<br>And at some point, something breaks.</li>
<li>Credit spreads are an incredibly important variable to monitor if one wants to grasp at which stage of the leverage cycle we’re in: very narrow credit spreads imply borrowers have easy and abundant access to leverage while widening credit spreads are generally the canary in the coal mine for things to get worse for the private sector.</li>
</ul>


The main point behind the Financial Instability Hypothesis developed by Minsky was that artificial stability and low volatility generate complacency amongst economic agents and ultimately lead to suboptimal decisions: the seeds of the next crisis are sown in the good time.
Once economic agents are confident nothing can ever go wrong, borrowing happens on more and more relaxed terms until anybody qualifies for leverage without credible possibilities to produce enough cash flows to service their liabilities. And at some point, something breaks.
Credit spreads are an incredibly important variable to monitor if one wants to grasp at which stage of the leverage cycle we’re in: very narrow credit spreads imply borrowers have easy and abundant access to leverage while widening credit spreads are generally the canary in the coal mine for things to get worse for the private sector.


<ul><li>The money printer is out of order in 2022. Actually, we are even looking at BRRRR in reverse : the flow of credit reaching the private sector continues to materially slow down , as indicated by my G5 Credit Impulse metric.</li><li>On top of it, inflation is roaring its ugly head and Central Bankers are committed to turning monetary policy into explicitly restrictive territory as fast as possible.</li><li>When the flow of credit slows down and policymakers double down by pushing monetary policy into restrictive territory, you don’t play offense with your portfolio. You play defense</li></ul>

The money printer is out of order in 2022. Actually, we are even looking at BRRRR in reverse : the flow of credit reaching the private sector continues to materially slow down , as indicated by my G5 Credit Impulse metric.On top of it, inflation is roaring its ugly head and Central Bankers are committed to turning monetary policy into explicitly restrictive territory as fast as possible.When the flow of credit slows down and policymakers double down by pushing monetary policy into restrictive territory, you don’t play offense with your portfolio. You play defense

Has Your Portfolio Realized That The Money Printer is Out of Order?

<ul>
<li>I am not sure everybody has grasped yet how important was the message Jerome Powell sent yesterday during the FOMC press conference.</li>
<li>While market commentators are focusing mostly on the mere 25 bps hike and the lack of details on Quantitative Tightening, I believe they are missing the point: the forward guidance was very hawkish, and very clearly so.</li>
<li>
<p>Powell is becoming more and more hawkish as time goes by. I identified 4 key hawkish messages he conveyed</p>
</li>
</ul>


I am not sure everybody has grasped yet how important was the message Jerome Powell sent yesterday during the FOMC press conference.
While market commentators are focusing mostly on the mere 25 bps hike and the lack of details on Quantitative Tightening, I believe they are missing the point: the forward guidance was very hawkish, and very clearly so.

Powell is becoming more and more hawkish as time goes by. I identified 4 key hawkish messages he conveyed



The Fed is Hitting The Brakes: Are You Wearing your Seatbelt?

Managing Director

Elan Gore

TMI Data Science

TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade & traditional media.  Our proprietary software, TMI Machine, is a text-mining platform designed with the buy-side & capital markets professional in mind, text-mining the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income & individual equities.  TMI provides custom leading indicators and systematic trading strategies, operating at the nexus of linguistics & statistics drawing on vast experience in investment banking and hedge fund settings in senior quantitative and fundamental roles.  

TMI Data Science was founded by Elan Gore, an award-winning Senior Global Basic Materials Equity Analyst & China Economist with 15 years of experience in North American hedge funds & institutional managers; and Alessandro Porrino, Ph.D., an Algorithmic Trading Analyst and Programmer with 10 years of front-office experience ranging from complex FX option pricing to auto-hedging strategies at Bank of America Merrill Lynch and Standard Chartered.  Mr. Gore holds an MBA in Finance from New York University Stern School of Business, and Mr. Porrino holds a Ph.D. in Systems Engineering from Brunel University London.

Cross Asset Strategy

<ul>
<li>As the street warms up to a potential Biden victory, arguments for improving equity breadth and cyclical rotation are starting to emerge again</li>
<li>Financial media references to a cyclical rotation saw a multi-STDEV spike in June, which coincided with a significant and notably enduring lift in the ratios of US industrials-to-staples and transports-to-staples </li>
<li>Our testing highlights the US transports-to-staples ratio as the most correlated with the cyclical rotation theme, but we see similar action in the copper/gold ratio and EM currencies</li>
<li>In the past 10 days, our text-mined data shows an incipient pro-cyclical move, but its momentum has yet to fully turn net-positive</li>
<li>Calls for a cyclical rotation softened through the September correction, COVID-19 second wave fears and more recent fiscal stimulus uncertainty; but the cyclical/defensive sector ratios endured as the structural reframing of a Biden presidency as an inflation-positive outcome went mainstream</li>
<li>While historically "cyclical rotation" and "value rotation" were strongly correlated, we have seen a decoupling in these themes due to the heavy burden of the COVID-19 crisis on financials and energy</li>
<li>Economists have pointed to the increased likelihood of a vaccine in H1 as a driver of recent bullishness and inflationary optimism, but observations from text mining and from the Superforecaster survey (Good Judgement Project) do not suggest new positives here</li>
<li>Predictably, at this stage of post-pandemic recovery the focus of cyclical rotation is on industrials and materials (particularly mining &amp; construction materials), with a Biden win implying elevated infrastructure spend</li>
</ul><div class="content-highlight"><p>TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade &amp; traditional media. Our proprietary software text-mines the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income &amp; individual equities. </p></div>


As the street warms up to a potential Biden victory, arguments for improving equity breadth and cyclical rotation are starting to emerge again
Financial media references to a cyclical rotation saw a multi-STDEV spike in June, which coincided with a significant and notably enduring lift in the ratios of US industrials-to-staples and transports-to-staples 
Our testing highlights the US transports-to-staples ratio as the most correlated with the cyclical rotation theme, but we see similar action in the copper/gold ratio and EM currencies
In the past 10 days, our text-mined data shows an incipient pro-cyclical move, but its momentum has yet to fully turn net-positive
Calls for a cyclical rotation softened through the September correction, COVID-19 second wave fears and more recent fiscal stimulus uncertainty; but the cyclical/defensive sector ratios endured as the structural reframing of a Biden presidency as an inflation-positive outcome went mainstream
While historically "cyclical rotation" and "value rotation" were strongly correlated, we have seen a decoupling in these themes due to the heavy burden of the COVID-19 crisis on financials and energy
Economists have pointed to the increased likelihood of a vaccine in H1 as a driver of recent bullishness and inflationary optimism, but observations from text mining and from the Superforecaster survey (Good Judgement Project) do not suggest new positives here
Predictably, at this stage of post-pandemic recovery the focus of cyclical rotation is on industrials and materials (particularly mining &amp; construction materials), with a Biden win implying elevated infrastructure spend
TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade &amp; traditional media. Our proprietary software text-mines the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income &amp; individual equities. 

TMI Thematics: Cyclical Rotation Through The Lens of Text Mining

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<p>Key support levels we have been monitoring (the 200-day MAs on the S&amp;P 500 and equal-weighted S&amp;P 500) have failed to hold, something we noted as increasingly likely in last week’s <em>Compass</em>. Despite the break below support, the move lower has been orderly but technical indications remain mixed. The weight of the evidence leads us to remain cautious. In today’s report we highlight attractive Groups and stocks within Materials and Financials: Large-Cap and Small-Cap Gold, and Large-Cap and Small-Cap Property &amp; Casualty Insurance.</p>

Key support levels we have been monitoring (the 200-day MAs on the S&amp;P 500 and equal-weighted S&amp;P 500) have failed to hold, something we noted as increasingly likely in last week’s Compass. Despite the break below support, the move lower has been orderly but technical indications remain mixed. The weight of the evidence leads us to remain cautious. In today’s report we highlight attractive Groups and stocks within Materials and Financials: Large-Cap and Small-Cap Gold, and Large-Cap and Small-Cap Property &amp; Casualty Insurance.

U.S. Equity Strategy: Technical Indications Mixed; Outlook Remains Cautious

United States

iShares iBoxx High Yield Corporate Bond ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.

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iShares iBoxx High Yield Corpo (HYG US)

The Name Is Spread. Credit Spread.

The main point behind the Financial Instability Hypothesis developed by Minsky was that artificial stability and low volatility generate...

Alfonso Peccatiello (Alf)

Has Your Portfolio Realized That The Money Printer is Out of Order?

‘‘There are no gurus. There are only cycles.’’ Michael Gayed The money printer is out of order in 2022. Actually, we are even looking at BRRRR...

Alfonso Peccatiello (Alf)

The Fed is Hitting The Brakes: Are You Wearing your Seatbelt?

I am not sure everybody has grasped yet how important was the message Jerome Powell sent yesterday during the FOMC press conference.

Alfonso Peccatiello (Alf)

TMI Thematics: Cyclical Rotation Through The Lens of Text Mining

As the equity melt-up sees renewed "cyclical rotation" calls, we text-mine the global financial media to find early signs of recovery in the theme...

Elan Gore

U.S. Equity Strategy: Technical Indications Mixed; Outlook Remains Cautious

Key support levels we have been monitoring (the 200-day MAs on the S&P 500 and equal-weighted S&P 500) have failed to hold, something we...

Vermilion Research

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