The Macro Compass

A ‘‘very strong’’ labor market report coupled with the first preliminary signs of inflation slowing down have brought back 2021-like euphoria in risk assets : junk credit spreads are tightening fast, meme stocks are going through the roof and even Turkey (!) is now priced as a much safer investment despite front-end real interest rates as low as -60%. In the investment world, when markets are beha...

‘‘Almost every financial blow up is because of excessive leverage.’’ Seth Klarman - Hedge Fund Manager Hi all, and welcome back on The Macro Compass! I find August to be a great month to focus on the big picture and thoroughly enjoy the never-ending learning journey in global macro - no Central Bank meetings, (often) quiet markets and perhaps a bit of well-deserved relax. Hence it seems like the p...

‘‘We are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data dependent going forward.’’ Jerome Powell, July 2022 FOMC press conference Hi all, and welcome back on The Macro Compass! Despite admitting that economic growth is clearly slowing down, the Fed just hiked by another 75 basis points and rei...

‘‘I've lived through enough bear markets that if you get aggressive on the short side, you can get your head ripped off in rallies.’’ Stanley Druckenmiller, June 2022 Hi all, and welcome back on The Macro Compass! In an interview released last month, legendary investor Stanley Druckenmiller reminded everybody how bear market rallies can be a challenging experience for people comfortably sitting on...

‘‘Trust I seek and I find in you (global macro)Every day for us something new (right, J-Pow?)Open mind for a different view (always)And nothing else (except macro) matters’’ Metallica after reading The Macro Compass Ehy guys, welcome back on The Macro Compass! Hopefully the Metallica are fine with me borrowing one of their most famous songs, but it’s really true: nothing else except macro matters...

‘‘We are at the early stages of the U.S. economic expansion’’ James Bullard - June 24, 2022 Hey guys! Back from my holiday, and happy to be writing a piece of The Macro Compass again. While I was out, the Fed kept talking the US economy up but economic data showed clear signs of slowdown and we witnessed big moves in markets that seem to compound that thesis. ‘‘Global R’’ calls even are making the...

I don’t see recession chances as particularly elevated now, as consumers have a very substantial cushion of savings. 100 bps hikes are not off the table. Jerome Powell - Senate Banking Committee hearing, June 22nd 2022 In yesterday’s Senate Banking Committee hearing, Powell brought his hawkish stance to new highs : a strong economy underpinned by healthy levels of consumers’ savings, 100 bps hikes...

We won’t declare victory until we see a series of consecutive, sharp declines in the monthly rate of inflation. Jerome Powell - FOMC press conference, June 15th 2022 Heading into yesterday’s Fed meeting, the bond market asked a tough question to Powell: do you mean business? Powell took a ‘’Bad Cop, Good Cop’’ stance: he answered with a firm ‘’Yes’’ at first, and then tried to soften the message d...

Pelley: “Where does it come from? Do you just print it?”Powell: “We print it digitally. So as a Central Bank, we have the ability to create money digitally. ’’. Jerome Powell - ‘‘60 Minutes’’ interview, May 2020 In a famous interview released on May 2020, Jerome Powell stated Central Banks can print money in digital format. And he is right, they indeed do that when they embark in policies such as...

‘‘Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong’’. Benjamin Graham - The Intelligent Investor Investing is all about probabilities: all you need to do is assess the chances markets are assigning to different scenarios today and anticipate how this probability distribution will move o...

‘‘The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stops are, and I do that so I can define my maximum drawdown. At the end of the day, the most important thing is how good you are at risk control.’’ Paul Tudor Jones, CEO of Tudor Investments Different investors perceive and measure risk differently,...

‘‘What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that: we clearly have still a job to do when it comes to cooling down demand’’ Jerome Powell, May 17th 2022 Powell’s remarks in the Wall Street Journal interview this week were quite interesting, and markets seem to have noticed: we have seen quite some wild moves , but again...

‘‘Nothing so weakens a government as inflation’’ John Kenneth Galbraith The latest US inflation report was all but portraying a benign slowdown in inflationary pressures. On the contrary, the less distorted month-on-month measures showed a pickup in CPI and most importantly the composition of such inflationary pressures is quickly broadening towards the stickiest components of the CPI basket. What...

‘‘The FOMC is not actively considering 75 bps hikes’’ Jerome Powell, May 4th 2022 Fed Meeting How do you assess whether the outcome of a Central Bank meeting was hawkish or dovish ? Simple: you look at the delivered outcome against the probability distribution which was priced in before the meeting. It’s not an absolute but a relative assessment. Yesterday, the Fed delivered a 50 bps rate hike and...

‘‘Stability breeds instability because stability itself is destabilizing’’ Hyman Minsky 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 not...

‘‘We're in a brave new world of excesses in fiscal and monetary policy, and that's where the bond vigilantes thrive’’ Ed Yardeni In the ‘80s, independent economist Yardeni coined the term ‘‘bond vigilantes’’ to refer to fixed income investors disciplining authorities for running inflationary fiscal and monetary policies and ultimately restoring order through the bond market. In 2022, we are witnes...

‘‘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 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 e...

‘‘I said that we needed to shift the focus to improving the quality and returns of economic growth, to promoting sustained and healthy economic development, and to pursuing genuine rather than inflated GDP growth and achieving high-quality, efficient, and sustainable development.’’ Xi Jinping, July 2021 China is supposed to become the largest economy in the world over the next decade, and yet it s...

‘‘My early blackjack career taught me several things. The first is that if you apply yourself with a lot of hard work and mathematical prowess you can beat the system.’’ Bill Gross Understanding the bond market is paramount important to achieve that clear macro big picture most investors strive for when designing their investment portfolios: the Bond Market 101 Series is my best attempt to help yo...

‘‘We are attentive to the risks of potential further upward pressure on inflation and inflation expectations. The Committee is determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy.’’ Jerome Powell, March 2022 FOMC press conference I am not sure everybody has grasped yet how important was the...

‘‘When people begin anticipating inflation, it doesn’t do you any good anymore.’’ Paul Volcker We are at important global macro crossroads : Central Banks are trying to remove accommodation from markets to tame inflationary pressures right at a point when the impulse of global growth has lost momentum and we are witnessing a military escalation in Ukraine. This piece will try to unpack for you: *...

Hey everybody, welcome back to The Macro Compass! ‘‘Long ago, Ben Graham taught me that price is what you pay but value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.’’ Warren Buffett This is a special edition. We have the pleasure to host a discussion with a great macro analyst: Lyn Alden! I sat down with her for a fireside...

‘‘Buy land, they’re not making it anymore.” Mark Twain The real estate market is likely to experience a short-term slowdown in 2022 amidst its intact long-term bullish trend. While its dynamics seem to be somewhat unpredictable, in this piece I will argue that both the short-term and long-term path for house prices depend on some clearly identifiable drivers : inflation-adjusted mortgage rates, re...

‘‘When you combine ignorance and leverage, you get some pretty interesting results’’ Warren Buffett Real interest rates were in a secular declining trend centuries before the Federal Reserve or other central banks were established. That’s because the most important drivers of long-term real yields are to be found more in demographics and productivity trends than in monetary policy decisions. But w...

‘‘As a rule, any loan that had been turned into an acronym or abbreviation could more clearly be called a subprime loan, but the bond market didn't want to be clear .’’ Michael Lewis in The Big Short. Let’s face it: the bond market can be deceptive for many. Plenty of incomprehensible jargon and technicalities, which often lead to the opposite outcome: over-simplified narratives , easy to grasp bu...