2025-03-31 14:31:37
Hi everyone - this is Alf, the CIO of my macro hedge fund Palinuro Capital.
I hope you're having a great day.
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And now, to today's macro research piece.
‘’There are decades where nothing happens; and there are weeks where decades happen’’ – Vladimir Lenin.
Markets were sleepwalking into April 2nd before we had a decent sell-off in US stock markets on Friday.
But the size of the YTD sell-off (a mere 5%) masks a very interesting pattern happening below the surface.
For the first time since the first half of 2008, we are observing a rare macro pattern – almost a unicorn.
The S&P 500 and the US Dollar are going down at the same time:
The chart at page 1 shows the 3-month rolling returns for the US Dollar Index (DXY) and the S&P 500.
Historically, large SPX drawdown (left part of the scatter) tend to see the USD rallying heavily: the most convex USD appreciation (upper side of scatter) tends to coincide with bad equity drawdowns.
This also implies that the upper-left quadrant (SPX down a lot, USD up a lot) experiences the most elongated tail of all the quadrants.
The ‘’Macro Unicorn’’ bottom-left quadrant with SPX drawdowns happening alongside a weak USD is not very populated. It’s crucial to remember the last Macro Unicorn dot goes back to July 2008.
Why was it so hard for the USD to weaken while the S&P 500 was going down?
This is because of three reasons:
1) After 2008, the Eurodollar system blew up in size and never looked back;
2) The US aggressively swallowed global trade surpluses, and in exchange became the epicenter of all global financial flows into Treasuries and US stock markets;
3) Policymakers applied growth-friendly disinflationary policies and politicians postured towards defending Pax Americana on the geopolitical front
With such a combination of factors, the USD tends to appreciate during risk-off events.
A portion of the 12+ trillion dollars of USD debt issued by foreign entities has to be refinanced in any given year, and a risk-off environment which threatens to slow down global trade means all foreign entities rush to buy USDs to service their debt.
Foreign investors buy Treasuries because the Fed has your back and it will cut rates if financial conditions materially worsen – cross-border buying of US Treasuries strengthens the USD as money flows in the US.
The same foreign investors are reluctant to wind down their US equity exposures because Fed cuts will ultimately restore confidence.
Net-net, the USD goes up in risk-off events.
The only periods when the USD weakened alongside the SPX were 1998, 2002 and H1 2008.
These are all periods where US bubbles ended up deflating rapidly: think of the Dot Com bubble burst in 2001 or the US housing market crash of H1 2008 – before it turned into a global financial crisis.
These episodes all have one thing in common: a US idiosyncratic crisis.
And today, US policymakers seem to be doing all they can to generate one.
On the macro front, the US administration is injecting a large amount of uncertainty.
The ‘’no-visibility’’ approach from Trump on tariffs brings big unpredictability – and it’s also nearly impossible for US companies to plan capital expenditures and hiring given there is no visibility on tariffs.
To that business uncertainty, you need to sum up the leaked White House memo to the Washington Post (here) which aligns with the recent Musk interview highlighting a 25-35% cut to the federal workforce to achieve budget savings close to $1 trillion/year by the end of May.
Former Linkedin Chief Economist Guy Berger looks at a variety of high-frequency leading job market indicators, and I respect him as a non-biased non-alarmist economist.
He just produced the chart you see below:
Quoting him: ‘’The diffusion index of future headcount plans is now worse than it was immediately prior to the election. Additionally, and concerningly, that pessimism about the future is also affecting the present: the diffusion index of recent employment actions is trailing a year earlier by more than pre-election.’’
And this is before the Trump administration starts slashing ~800k federal employees.
To add to the potential ‘’Macro Unicorn’’ move which stems from a US idiosyncratic crisis, we are witnessing the very first signs of the unwind of the gigantic long US equity position held by foreign investors.
As shown by my friend Brent Donnelly, it is very rare to experience a month when the DAX is up while the SPX down – and we just experienced it:
If you take a step back, you realize that foreign investors have accumulated a gigantic amount of US securities since 2010. Trade surpluses came with a USD surplus for countries like Germany or Norway, which then recycled these excess USDs back into US Treasuries and US stock markets.
Canadian and Swiss investors own US securities to the tune of 100%+ of their GDP:
What if some of these foreign whales decide to reduce their exposure to US assets?
It would make sense given the new US geopolitical stance, the non-supportive policy mix (non-proactive Fed and tighter fiscal stance), business uncertainty from tariffs and still elevated valuations.
And what if markets get caught by surprise by a sudden change in correlations?
Exactly like in early 2022 when the correlation between bonds and stocks turned positive after 10+ years of persistently negative correlation as the Fed embarked in a hiking cycle that also hurt stock markets.
The Trump administration is trying to achieve an arduous trifecta: a weaker USD, lower yields, and a robust stock market.
Historically, to achieve this rare trifecta you need very disinflationary policies (yields and USD down) and a supportive Central Bank that boosts stock market sentiment.
The current policy mix of geopolitical shifts, tariffs and macro uncertainty risks achieving a weaker USD and lower yields but at the expense of the economy and the stock market.
After 17+ years of absence, the Macro Unicorn of simultaneously weak USD and weak US stock markets could stage an unexpected comeback.
Long-term macro investors should reduce their (implicit or explicit) exposure to the USD which has historically served well as a hedge against stock market drawdowns – if the Macro Unicorn appears again, a long USD long stock position could hurt twice.
If you are a hedge fund or a more active institutional investor, there are very interesting derivatives trades that can be structured to take advantage of the Macro Unicorn – text me (Alfonso Peccatiello) on Bloomberg and I’ll be happy to discuss.
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2025-02-23 20:46:19
Hi everybody, Alf here - welcome back to The Macro Compass!
Before we go into today’s piece, a short announcement.
I advise several institutional investors on a bespoke basis.
Clients include Canadian pension funds, one of the biggest tech companies around, and top 3 multimanager hedge funds in the world.
Services go from sitting on the investment committee as an independent advisor, to constructing specific macro portfolios/hedging programs and consulting on a day-to-day basis (i.e. act as their independent macro analyst).
Are you are interested in my macro advisory services?
Please shoot an email with your request at: [email protected]
Fair warning: it’s not cheap, and it’s only for institutional investors.
Now, to the piece.
The first 5 weeks of the year have seen international equities outperforming the S&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.
Let’s take a look at why.
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.
Today, it sits at 4.5% which is exactly the average level it recorded in 2014-2019.
These are the Goldilocks growth conditions and controlled inflation that international stocks enjoy.
Let’s now perform a data-driven analysis of what asset classes perform best during this prevailing macro conditions, and specifically when:
Core inflation is in the 1.75-2.25% range;
Real growth is in the ~1.50-2.50% range.
Here is what we found:
On a risk-adjusted basis, bonds do well - especially the long-end.
Stocks perform well too, with international stocks performing slightly better than US stocks: in our sample, European stocks pop up very often with CEE countries (higher beta like Romania or Hungary) leading the table.
To do well, international stocks need a combination of:
Goldilocks growth conditions (no US exceptionalism);
(On the way to be) controlled inflation and predictable Central Banks;
Reasonable valuations and a new narrative replacing the existing stale one.
Which brings us to the other required conditions: friendly developments in inflation coupled with a reasonable Central Bank, cheap valuations and a new narrative prevailing.
What are the best countries to look at today?
Let’s have a quick look at valuations:
The table above shows the forward P/E ratio for various international equity markets, and the most right column shows the 10-year percentile of valuations.
Broader European equities are still reasonably valued (Stoxx 600 more than Stoxx 50 which tends to give more focus to large cap German and French companies), but the standout country remains Poland.
Outside Europe, several countries in Asia and LatAm show cheap valuations.
Price-to-earnings ratios alone are not enough as a metric for valuations, and to broaden up the valuation assessment I like to look at Free Cash Flow Yield too.
FCF yield is the ratio between free cash flows and enterprise value, and you can think of it a measure of the amount of net cash genetated by the company and literally available to stock investors divided by the enterprise value.
The table below shows the 10-year percentile of FCF yield for different US and EU sectors, and different stock indexes around the world - the lowest the percentile, the cheaper the valuation:
If you consider valuations, policymaking and narratives my shortlist for international equity markets includes:
Developed markets: Europe, Japan, and Canada
Emerging markets: China and Mexico
Europe, Canada and Mexico were ‘‘priced to die’’ under the tariff threat, but as time goes by without much being done there investors are slowly realizing that inflation is under control and Central Banks are acting dovish. That supports stock markets.
In Japan, valuations are still broadly attractive because investors are growing nervous on how hawkish the BoJ will be - yet nominal growth is doing great (~5%+) and Ueda already verbally intervened to put a cap on bond yields.
Strong nominal growth and a cap on excessive tightening will benefit Japanese stocks.
Despite the big rally, Chinese stocks are still reasonably priced - the PBOC remains ready to ease, some fiscal spending is happening, and investors are largely underallocated.
In short: our analysis suggests that an ‘‘International Risk Parity’’ portfolio built with long US bonds and long international equity markets will perform well in H1 2025.
Thanks for reading!
If you enjoyed this piece, please share it with a friend:
Before you go, don’t forget this.
I advise several institutional investors on a bespoke basis.
Clients include Canadian pension funds, one of the biggest tech companies around, and top 3 multimanager hedge funds in the world.
Services go from sitting on the investment committee as an independent advisor, to constructing specific macro portfolios/hedging programs and consulting on a day-to-day basis (i.e. act as their independent macro analyst).
If you are interested in my macro advisory services, please shoot an email with your request at [email protected]
Fair warning: it’s not cheap, and it’s only for institutional investors.
2025-02-07 14:56:51
Hi everyone, Alf here - welcome back to The Macro Compass!
I am proud to announce that my macro hedge fund Palinuro Capital is live!
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And now, to the piece.
Our main macro thesis for the first half of 2025 is that another disinflationary wave will hit the US.
We expect core PCE to annualize at or below 2% in H1 2025.
Our Leading Inflation Indicator suggests we might be due for one last wave of disinflation in the first half of 2025:
To add some substance, this Leading Inflation Indicator is built using the 7 most statistically significant forward looking indicators for core US inflation.
The most recent dip is mostly attributable to leading indicators of shelter inflation, which represents 30%+ of the core US inflation baskets.
As you know, official shelter inflation tends to incorporate on-the-ground rent growth with a delay due to its methodology and series like the Zillow Rent Index have been used to predict where shelter inflation will go.
The CoreLogic single family rent index is one of the best predictor of shelter inflation, and it just printed at the lowest level in 14 years:
Some weakness in the housing market is starting to emerge - as evidenced by other leading indicators as well.
One of the main reasons why the housing market held up so well despite high mortgage rates was the gigantic backlog to work through.
During the pandemic, the demand for housing was super hot but supply bottlenecks and labor shortages lengthened the housing construction cycle - and this led to large backlogs which kept the housing market afloat.
Big US homebuilders like D.R. Horton are now reporting their backlogs have returned to 2019 levels, so this tailwind seems exhausted:
Additionally, yesterday's JOLTS report shows that the job openings for the construction sector are shrinking fast (see chart below).
The construction sector is key to the US business cycle, and cyclical weakening there has always been an early signal of a broader softening in US growth conditions.
Just to be clear: construction workers aren't getting laid off yet.
But it seems that the conditions are in place for a slowdown in the housing sector, which also leads to disinflation through the rent of shelter component:
Incoming data on inflation, growth and the housing market suggest a disinflationary slowdown in growth could be ahead of us. In that case, the Fed could quickly switch to a quarterly pace of cuts and reassert the Fed Put.
This ‘’proactive risk management’’ dovish stance would ease financial conditions = stocks and bonds rally:
Looking at the relative valuations across stocks and bond markets, the best risk/reward lies in fixed income.
At the moment, this is what the market is pricing the Fed to do over the next 2 years:
The Fed is priced to be on hold in March, deliver maybe 2 cuts in total this year, and pretty much stop there.
The terminal rate is priced around 3.90% - and that’s where the Fed cutting cycle stops.
Given the odds of Fed hikes are relatively small as long as Powell remains Fed Chair until May 2026, bonds offer an interesting risk/reward if my disinflationary thesis proves correct.
This was it for today, thanks for reading.
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2025-01-19 15:59:21
Next week will be crucial for markets as Trump is set to announce (or disappointingly not announce) tariffs.
In this piece I will highlight the rationale behind my base case scenario and its impact on markets.
Before we do that, I want to share something with you.
I am offering a FREE trial to my institutional macro research service!
The service includes:
Multiple macro research pieces per week;
Timely coverage of important events and market implications;
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If you are a HNW private investor, a family office or an institutional investor feel free to request a free trial using the link below:
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And now, back to the article.
The biggest risk Trump runs with tariffs is a bond market insurrection: if investors perceive inflation as too high, tariffs can generate an injection of risk premium that launches bond yields to the moon.
In turn this would tighten financial conditions, slow down the economy, hamper Trump’s plans to reduce borrowing costs for the US, and just make him quite unpopular (people hate inflation spikes).
Luckily for him, the recently released inflation report suggests core PCE is trending at 2.3% - not bad:
Additionally, the latest job market report was encouraging and the control group of retail sales is running at 5.4% - around 2018 levels, when the pre-pandemic economy was considered strong. The economic momentum and a 2.3% trend in core PCE inflation provide Trump cover to go big on tariffs.
As the Fed hiked rates, all other Central Banks around the world merely followed the same strategy. The big issue here is that not all economies were equipped to handle such an abrupt increase in rates.
After the GFC, the US economy has deleveraged its private sector – private debt to GDP is down in the US. The US private sector also borrows mostly on fixed rate for long tenors (think about 30-year mortgages). The US also issues bonds in the global reserve currency, so bond vigilantes are unlikely to go after the US.
But what if another economy had high private sector debt, or upcoming refinancings, or floating rate mortgages and corporate borrowing which makes the passthrough of rate hikes fast and furious?
In that case, the economy will prove quite vulnerable to a prolonged hiking cycle.
The BIS just updated their private sector Debt Service Ratio (DSR) for H2 2024 – this snapshot allows us to verify in which countries households and corporates are under pressure from a prolonged hiking cycle.
Red or green colors refer to how much the DSR is above or below its long-term average in that country:
Notice how Canada and China are under increasing pressure.
And it would make sense for Trump to go after them – negotiating with a weak counterpart is always better. But identifying vulnerable economies is not only about the Debt Service Ratio – politics also matters.
For example, Germany is very unlevered as an economy: the German DNA prevents (for now) any proper deficit spending, and the private sector is also relatively conservative on how much it leverages.
As a consequence, the DSR doesn’t really pick up – yet the German economy is vulnerable.
Its business model of cheap energy imports and outsourcing production and manufacturing has been challenged by the pandemic, and China has made huge progress as a competitor for car exports. The German economy has taken a major hit, and people aren’t happy.
New elections are planned for February, and negotiating with a country in political turmoil is always better. From a game theory perspective Trump could decide to focus on China, Canada and Germany.
Even if Trump wants to target the most vulnerable economies, he must be careful.
Let’s take a look at the countries the US imports the most from, and in which categories of imports:
The car, pharma, oil and household/tech goods industries are by far the largest import sectors for the US. And Mexico, China, Canada and Germany the top 4 countries that exports the most volume to the US.
If Trump’s intention is to raise the most amount of money through tariffs on the most vulnerable economies, basic logic imposes equally heavy tariffs on all these 4 countries above.
But there is a risk in going huge against China from the get-go. While it’s very unlikely that Canada and Europe will protect their currencies, China could decide to do it.
And if we get 25%+ tariffs on China from the get-go but the CNY doesn’t weaken, US consumers will feel it. Higher import prices on Chinese goods without an offsetting move up in USDCNY = US consumers will take the hit out of Chinese tariffs, and not China.
Here, game theory would hence suggest Canada and Europe are the prime candidates for heavy tariffs.
Given that:
1) Soft inflation and solid growth provide cover for Trump to go aggressive on tariffs
2) To increase his negotiating power, Trump might focus on the most vulnerable economies
3) China, Canada and Europe are 3 vulnerable economies and the all export a ton to the US
4) But China can hit back via supporting the CNY = US consumers would pay for tariffs
5) Canada and Europe are not in a position to defend their FX, and they face political jitters
My base case for tariffs sees:
A global tariff rate of 10%
Additional targeted tariffs on China (phased-in monthly increase of 2.5% with no end in sight)
Additional targeted tariffs on Europe and Canada for a total of 25% to start (+ monthly increases)
If this unfolds, the market is not prepared.
Over the following 2-4 weeks, I would expect:
A) EURUSD to breach parity, and USDCAD to march towards 1.50
B) Bonds to rally at first, and stabilize after
C) An initial knee-jerk negative reaction in stock markets
If you liked this article, please share it with a friend.
And remember: I am offering a FREE trial to my institutional macro research service!
The service includes:
Multiple macro research pieces per week;
Timely coverage of important events and market implications;
Direct access to me
If you are a HNW private investor, a family office or an institutional investor feel free to request a free trial using the link below:
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Speak soon and have a wonderful day,
Alf
2025-01-05 17:26:02
Good morning, this is Alf - welcome back to The Macro Compass!
I wish you a fantastic year ahead: follow your passions, keep learning, and don’t drink cappuccino after 11am.
In this macro piece, we will cover the biggest market mover for H1 2025: tariffs.
We will also investigate what’s the most attractive asset class today.
But before we start, here is a present for you to kickstart this new year.
Early next week, I’ll publish my top 3 macro trade ideas for 2025.
If you want to:
Read my macro research multiple times per week;
Have access to my long-term macro ETF portfolio;
Receive all my tactical trade ideas (including next week’s)
You can now sign up to the premium TMC tier for 30% OFF.
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Discount Code ‘‘HNY’’.
Use the link below:
Now, to the piece.
What if tariffs end up being non-inflationary and negative for growth?
And what if Trump focuses on short-term painful policies first in H1, to then deliver tax cuts in H2?
Consensus isn’t ready for this.
Let’s disentangle the thought process behind the concept of ‘’disinflationary tariffs’’.
This paper from the new Council of Economic Advisor (CEA) Chair Steve Miran covers it – I’ll summarize.
The main idea is very simple.
In his previous term, the Trump administration increased the effective tariff rate on Chinese imports by 18%.
During the same time span, the US Dollar appreciated by 14% against the Chinese currency.
It basically means the after-tariff price in USD to import Chinese goods was almost unchanged.
As long as the USD appreciates, US consumers aren’t going to feel much inflationary pain from tariffs:
Yet we also know that tariffs are negative for business sentiment, investment, and growth.
Even if tariffs are phased in gradually as a negotiation tactic, the message will be clear: if you want to export your stuff in the US, you need to re-think your business model or cut your profits.
Additionally, it’s well documented that a super strong US Dollar acts as a drag for earnings growth in the US:
US companies generate about 60% of their revenues outside the US, and a strong USD doesn’t help there.
The charts above prove that was indeed the case in 1996-2001 and 2021-2023: a relentless USD appreciation (orange line down) slowly but surely weakened earnings growth (blue) for US companies.
Under the assumption that countries hit by US tariffs will accept a currency devaluation without a fight, there are reasons to believe that tariffs can be non-inflationary and negative for growth.
But can we safely assume China isn’t going to push back?
Why would China not try to stabilize their currency and export some inflation and pain in the US?
Let’s try to think this out as if we were Chinese policymakers.
We have three options:
1) Accept the hit: let the CNY weaken
2) Fight back: protect the CNY by selling down USD FX reserves, and hit back the US
3) Play the long game
I believe China will opt for 3: play the long game. And here is what I mean.
Chinese policymakers don’t face elections, but the Trump administration does – US midterms in 2026.
Rather than going for the extremes (1 or 2), China could decide to apply a long-term strategy that relies on two pillars.
A) Allow a steady CNY deval, and plug the hole with fiscal stimulus where needed
As China can afford to play the long-game from a political standpoint, they could opt for a middle ground between a full CNY devaluation and a strenuous defense of their currency by selling USD reserves.
B) Keep using ‘’middlemen’’ to dodge tariffs
We had some fun testing this hypothesis: can we show that China used ‘’friendly neighbors’’ to re-route their goods into the US as a way to circumvent tariffs?
Since the first round of Trump tariffs went live in 2018, China (and Hong Kong) now import a volume of goods in the US which is 5% lower than the pre-tariff era.
But at the same time, Vietnam + Korea + Thailand + Malaysia have all increased their trade flow with the US.
Coincidence?
Or China trying to dodge some tariffs by re-routing their goods exports to the US through ‘’middlemen’’?
Consensus is strongly positioned for tariffs to be:
A big macro event
Negative only for the rest of the world (US growth exceptionalism to continue)
Adding to inflation uncertainty in the US
I think there is space for consensus to be caught offside on all the above.
I could foresee a world where Trump phases in tariffs, China dodges most of them through middlemen countries, the anticipated inflation volatility doesn’t realize, but growth slows down because business investments are hit by uncertainty.
Given today’s pricing, the most attractive asset class in this scenario would be bonds.
Our models show that the option-implied probability for the Fed to hike (!) over the next 12 months is priced at 40%. That’s quite high, and it show the extent of hawkish pricing people pushed into the front-end of bond markets.
And not only that: the curve has bear steepened, and term premium has been injected in the long end too.
With Fed Funds at 4.25%, the bar being very high for the Fed to hike rather than cut, and 10-year yields at 4.60% (= positive carry) bonds look interesting here.
Especially if you think a strong USD will slow down corporate earnings, and that the hype about the macro impact of tariffs might be exaggerated.
This was it for today.
If you enjoyed it, please share this piece with a friend:
Finally: don’t miss the 30% discount on the premium TMC tier!
Early next week, I’ll publish my top 3 macro trade ideas for 2025.
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Read my macro research multiple times per week;
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2024-12-09 22:05:32
Looking back at the 2015-2021 period when I traded bond markets at a large bank, it was quite boring.
Rates were mostly stuck around 0% at the front-end, and to make money you had to find small dislocations and monetize them with leverage hoping volatility would remain low forever.
Today, the story is different: bond markets are truly exciting.
So let’s have a fresh look at them.
Before we do that though - an important announcement.
My macro hedge fund Palinuro Capital is going live in January.
This is a dream coming true for me.
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I expect the Fed to cut rates again in December.
Why?
See the chart below:
Even after the recent Fed cuts, today’s Fed Funds (orange) are still markedly above the underlying trend of core PCE inflation (blue).
The Fed is a simple animal: their dream is to have a stable labor market with predictable inflation.
And today, the main risk they see isn’t an inflation pick-up.
Instead, risk management forces them to protect the US economy against a deterioration in the job market.
Running a real Fed Fund rate (bottom chart, black) at +2% for several quarters on end is an exercise which was last performed in 2007.
I don’t think the Fed sees major benefits in running such a tight policy.
Hence, I believe they will cut rates by 25 bps in December.
But here is an argument for them to feel confident the US doesn’t need a major cutting cycle in 2025:
This chart looks at the US private sector (orange) and government (blue) debt to GDP since the 1990s.
It’s an incredibly important chart to approach US bond markets today.
The US went through two clear macro phases before today.
In phase 1 (before GFC), the US government refused to lever up: government debt as a % of GDP was at or below 60% and deficits were seen as a bad thing.
As the private sector didn’t receive any stimulus from government deficits and it grappled with declining demographics and productivity, it used leverage to achieve higher growth.
In phase 1, the US private sector was forced to lever up aggressively.
Until in 2008 excessive private debt and loose credit standards led to the Great Financial Crisis.
This kickstarted phase 2 of the long US macro cycle – the post GFC period.
Between 2009 and 2012 the US government printed money (read: deficits) to stabilize the US economy.
This allowed the US private sector to de-leverage: private sector debt as a % of GDP fell below 150%.
But this fiscal profligacy didn’t last for long: between 2014 and 2019 the US primary deficit as a % of GDP was less than -2% on average – mildly supportive for the private sector, but nothing special.
So we sat there in this limbo of acceptable GDP growth, but as neither the US government nor the private sector levered up aggressively we lived through a ‘’meh’’ US growth cycle.
Finally, C-19 hit and the game might have changed for good (phase 3).
Since 2020, US deficits have exploded and this has allowed the US private sector to de-leverage.
US private debt as a % of GDP is now the lowest since 2003 (!).
So: why does this matter for bond markets?
Because in a world with less private sector leverage, ceteris paribus interest rates can be a bit higher.
When there are less mortgages and corporate loans to refinance vis-à-vis higher nominal wages and earnings, the equilibrium interest rates at which the economy can function should be higher.
The flipside is obviously that an increasing load of government debt will have to be refinanced at higher rates.
In the US case though, that’s more manageable than for other countries due to the reserve currency status.
This is why the market feels quite strongly about terminal rates being well above 3% this time.
As per today, markets expect Fed Funds to still be at 3.50% in 3 years from now.
The most important implication for investors is this.
If the Fed embraces this new narrative, we are looking at few (if any) cuts left in 2025.
This is because if neutral rates are considered to be higher, the Fed doesn’t need to cut rates much more to achieve a neutral policy stance.
With euphoric expectations about earnings growth, nosebleed valuations and a less friendly Fed overly bullish investors might be disappointed in early 2025.
This was it for today. I hope you enjoyed this macro piece.
Please share it with a friend:
And also, don’t forget.
Do you want to be updated about the performance and progress of my hedge fund?
Fill in the form below and I will include you in the distribution list:
Have a fantastic day ahead,
Alf