The two main forces driving global macro and markets are: Change in (nominal) growth rate and the monetary policy stance.
Real economy currency issuance and key macro indicators inform us about the outlook for economic growth.
Monetary money creation and risk-free real yields are key to understanding central bank stances and their impact on markets.
The TMC Quadrant’s asset allocation model takes a data-driven approach to assess where you stand on both fronts. This is a handy tool to start your 2023 asset allocation journey.
In short, both in the US and in Europe, we are sitting Quadrant 4 – The most tricky quadrant for long-term macro investors.
Let’s briefly analyze both the x-axis (RoC of nominal growth rate) and the y-axis (MonPol stance).
X-axis: Nominal growth is set to decelerate sharply in 2023
- A) The pace of currency issuance in the real economy as measured by our flagship TMC The Global Credit Impulse Index is very low.
This index measures the rate of change in the amount of money (effectively % of GDP) held by the non-financial private sector in the world’s five largest economies.
In other words, is the real purchasing power of households and businesses accelerating or decelerating?
Preliminary data for October 2022 show that the -3.5% reading is overwhelmingly The worst in the last decade and consistent with GFC levels.
TMC Global Credit Impulse Index (Black, LHS) lead Earnings growth (blue, RHS) and inflation (orange, LHS) by 4-6 quarters.
as a result, Nominal growth is set to slow dramatically in 2023.
- B) Other key macro indicators are: Rapid deterioration of the job market.
Global Credit Impulse is just one of many forward-looking macro indicators in TMC’s data-driven macro and portfolio strategy approach. among many others, US financial conditions to tighten dramatically in 2022 set the stage for many Weakening of the labor market in 2023.
After all, how business cycle works.
Higher interest rates, wider credit spreads, lower equity multiples, stronger USD => Tighter financial conditions => Firms reduce discretionary spending => Growth and earnings decline => Deleveraging: Firms reduce CAPEX and workforce reduce
Hiring trends have been weak for about three quarters due to the rapidly deteriorating US financial situation. This measure will: The US should rapidly converge to zero in the first half of 2023.
We sit on the left side of the TMC Quadrant Asset Allocation model.
what about the other axis?
Y-axis: Monetary policy stance very tight
So far, we’ve talked about the real economy, such as credit, growth, and the labor market.
The quadrant model’s y-axis instead focuses on the stance of monetary policy and the pace of creation of monetary money (that is, bank reserves).
- A) Risk-free real yield is much higher than equilibrium – And it’s a matter of risk assets
Are interest rates high or low
it’s all about Relativity and equilibrium.
Both European and American economies Hyperfinancialization, Excessive Leverage, Gray Hairto varying degrees, but more or less in the same boat.
in short, equilibrium real interest rate (r*) The ability of these economies to operate smoothly and realize their potential growth without overheating or falling into recession is due to very low – Due to high levels of private and public debt, stagnant productivity and an aging population.
R* is approximately +25 bps in the US, -50 bps in Europe.
today, Markets Suggest Medium-Term Real Yields Much Higher than these equilibrium levels in both the US and Europe.
Real yields that are much higher than equilibrium undermine the private sector’s ability to borrow cheaply, thus providing investors with high risk-free returns and diminishing growth prospects.
No wonder you see it Whenever such a setting becomes popular US (2009-2010; Taper Tantrum 2013; Hike and QT 2018; Today) and Europe (2011-2012: Eurozone Debt Crisis) Risk assets struggled.
- B) It seems that the printing machine for financial banknotes is also broken.: BRRR to RRRB.
The rate of change in financial money (i.e. bank reserves) is another important factor needed to assess the overall monetary policy stance. A rapid increase in the volume of interbank money tends to encourage banks to make more risky investments and provide more liquidity to financial markets.
But given what’s going on USA QTnewly announced European QT and a lot of Repayment of TLTRO In Europe, the 6-month rate of change EU+US bank reserves are likely to hit a decade low in 2023.
So, investment method in such an environment?
This article originally appeared in The Macro Compass. Join this vibrant community of macro investors, asset allocators and hedge funds. subscription tier Using this link works best.