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Jay Powell: One Last Bull Run.
Guys, glad to be back, I mean that. Tuesday I was away from my structured schedule hence the missed macro breakdown, but I had to deliver for you all today! As always welcome back to Market Macro Hub! Jay Powell shook the markets this week with his speech so we’ll uncover everything you need to know from his Wednesday speech. Enjoy ;) The Good And The Bad: Powell’s Speech On Wednesday, Fed Chair Jerome Powell delivered a speech that many may call the “Fed pivot”. But was this really a Fed pivot, or did markets just take it out of proportion? Jay Powell confirmed what we were thinking, at the upcoming Fed meeting in December, the Federal Reserve will slow the pace of rate hikes. Now, you can imagine how markets reacted to that, the most powerful central bank has just announced they’ll be slowing down and taking their foot off the accelerator. Risk assets popped. I mean, popped! The Nasdaq closed Wednesday trading north of 4% , and the S&P up over 3%. Ok - you get the point know. Markets reacted with confidence that the Fed would stop/slow down the pace at which they are hiking interest rates. All positive, right? Not exactly, you see, markets seemed to latch onto one message. That being but completely ignored hints and direct intel that: So although the rate at which the Fed will continue to hike rates will slowdown, financial conditions within the economy will remain tighter for longer . So here comes the big question. What’s the good and the bad? The bad news first. Let me deconstruct what this chart means if you can’t already tell. The national financial condition index shows how tight or loose financial conditions are within U.S money markets , debt markets, shadow banks and equity markets . Here’s another view point of financial conditions within the U.S. Now you can see the components that make up the national financial conditions within the U.S. The idea is when the national financial conditions index is positive, as shown in 2006-12 & 2019-20/21, this is historically associated with tighter-than-average financial conditions . And for negative values historically this is associated with looser-than-average financial conditions . So after Jay Powell’s speech on Wednesday we saw the risk metric index, alongside credit and leverage all move towards the average of 0 . This is something you wouldn’t want to see as you tighten monetary policy within the economy, interest rates are at 4% within the U.S, the housing market is experiencing major slowdowns, growth as mentioned by Powell is also expected to be flat across Q4. So the figure 2&3 above reiterate the message that financial markets are clearly disconnected from the economic picture as a whole; for inflation to return to 2%, the acceptable and well functioning level, financial markets have to experience further declines in gains, liquidity & overall bullish investor sentiment in order to help the Fed bring inflation lower. So throw your bull hats away, it’s risk off season for the near future. Further evidence of financial conditions weakening is the yield of U.S10y, (don’t mind the subtle flex of the Bloomberg terminal, an expensive tool I must say!) The decline in US10y shows how investors are now betting on a lower terminal rate of interest from the Fed. Out with the safehavens (bonds, dollar) in with stocks & crypto, with BTC trading up >5% on Wednesday! I know it seems like I’ve gone on and on about the bad from Jay Powell’s speech, honestly speaking, it’s because there’s so much to talk about. The good? With the Fed potentially drawing near to the end of their hiking cycle this puts less pressure on central banks around the world to continue hiking rates in accordance to the largest and most powerful central bank, the Fed. Once the Fed truly pivot, and pause hiking the rest of the world are able to evaluate their hiking cycles and proceed towards the same outcome. Emerging markets and frontier markets started hiking before the Federal Reserve began hiking interest rates; so it’s safe to say that EM/FM countries are at the end of their hiking cycle and could potentially outperform developed markets through 2023, but I’m no expert on EM/FM markets, the main point is with the Fed easing off their hiking, there’s less pressure on these emerging nations to restructure debt/issue debt. As that has been the story over 2022, a tale of debt defaults and restructuring. As of today U.S CPI came out and there’s some hot topics you guys have recommend so I’ll be covering that next week! Thanks for getting to the end of this note, I share simplified tweets and threads here and interactive macro posts/productive content here on my Instagram, so be sure to drop a follow and connect ;) Your support never goes unnoticed. Trust me, I’ve got something good coming for you all just be patient with me! Until next time
Dec 2, 2022 · 5 min read
Europe. The Broken System
Europe - It’s as if there’s been a continuous fire burning under the Euro Area, right out of the 2007 Global Financial Crisis. In today’s piece, we cover The European Sovereign Debt Crisis . Welcome back guys, hope you’re all good & looking forward to this macro note ;) As always, lend me your attention from here on out: The Sovereign Debt Crisis Explained Maintaining price stability and healthy economic conditions for an economy is extremely challenging as we know, just look at the UK & the U.S. Let alone managing this across a whole union of countries. As you already know from previous articles, everything is interconnected. Everything. So, in the case of a debt crisis , the costs and benefits associated with a default within a monetary union are magnified for both the debtor and creditor countries. Because a “monetary union facilitates financial integration ,” and also cross-border-holding of government debts (majorly by banks) inside the monetary union (EU), in the case of a default, the knock-on effects are catastrophic. The cost of default to the creditor in this scenario is multiplied, here’s how. Although Greece wasn’t the only European nation to default on its debt we’ll use it as an example; the costs of a default for the creditor not only is the principal amount loaned out, but even greater collateral damage, through the contagion risk, aka widespread risk associated in being within the same union. Things such as: Liquidity seems to be at the heart of every crisis we’ve seen, or most. In the case of Greece, a sovereign default would put domestic banks within the eurozone at risk mainly because they would have been holding Greek bonds & potentially using those debt instruments as collateral to access liquidity from either the ECB or other financial/sovereign institutions. One man’s debt, another man’s asset, that’s until the first man defaults! All in all, everything would have had a torn apart due to the default of Greece and other countries such as Portugal, Ireland, Cyprus, Spain & Italy who were unable to pay or refinance their government loans or even bailout indebted banks under their supervision without support from third party organisations (IMF). After scanning through documents and fillings online, I found out that a “sovereign default inside the eurozone has been interpreted by many policymakers and economists as the first step towards the potential exit of the defaulter from the monetary union.” Now, I’m not too sure how much truth this statement holds but I can see how such countries may be sidelined and disregarded when it comes to important policy decisions that have to be carried out within the eurozone. Here’s the backstory of how this all fell apart. The Global Financial Crisis After the recession and crisis of 2007, what became apparent within the euroarea was the absurd level of debt to GDP as a percentage, amongst certain nations within the ECB. Debt is a great instrument to drive growth, but as the interest rate environment starts to heat up, restructuring and financing debt becomes extremely hard. Additionally, the sudden halt of foreign investment to countries such as Greece sparked fears that the Greek government would not be able to finance such levels of debt. You’re probably looking at the chart thinking, this can’t have happened. Yes, it really did. Yields on 10-year debt instruments from Greece hit as high as 29.24%! But why you may ask? Here’s the reason: Greece’s debt to GDP was 109% in 2008 and rose to 146% just two years later! Bear in mind, the eurozone put in place a pledge which said the debt of any country within the eurozone shouldn’t exceed 60% and the government budget shouldn’t exceed 3% of its GDP, Greece doubled that by 2009-10 and their government deficit was -15% . Unsustainably high debt to GDP = greater risk of default = greater reward demanded by investors A lesson I have broken down a number of times talking about how credit ratings can cripple an economy. But back to the point. The talk around Greek bonds became so negative that the only way they could attract investors was to offer high double digit yields on their loans. This only accelerated the downgrading of Greek bonds as perceived risk grew, access to capital dried. Here’s the collateral knock on effect. As investors demanded more yield from Greece, they also began looking at Portugal, Spain, Cyprus and many others demanding higher yields on the debt instruments - so the bond market of these countries also suffered major blows as they had to offer +10% on their yields! Knowledge drop: I was speaking with a friend who’s works at an emerging markets research firm, very knowledgeable on that forefront to say the least and he said when bond yields hit 10% funds call it ‘loosing market access’ because these countries are no longer able to raise money in international markets, due to the risk associated that their sovereign debt has reached a certain distressed point that it’s not worth purchasing as its near defaulting/bankruptcy. Now that’s emerging markets, Europe is considered a domestic market so you can imaging how rough financial conditions would have been in Greece, Ireland and Portugal, all countries whose bonds were >10% . By early 2010, Greece requested for a bailout to help pay back its creditors and received support from an EU-IMF( International Monetary Fund) package totalling €110 billion to rescue Greece from defaults. Following Greece, Ireland, Portugal, Cyprus and Spain all requested bailouts to stay afloat. Why Not Devalue The Euro? This may be a question arising in your head. Heck, it did in my mind after some research. China is a perfect example of a country that uses currency devaluation to its benefit. Here’s why. Devaluing a domestic currency reduces the purchasing power and strength of that currency, let’s say the Chinese Yuan in this example. What this does is make the devalued currency’s goods more attractive to the global world of trade as the value of China’s exports will cost less in your respective currency. So a nation’s exports become more competitive globally. It’s not all positives however, as you devalue your currency imports become increasingly expensive as well as debt servicing/repayments if the debt is denominated in a foreign currency like the dollar. So this strategy works great for net exporters of goods & services as supposed to importers. August 11th 2015, China devalued their domestic currency against the dollar in order to boost exports as recent data showed exports were down 8.3% YoY compared to July 2014. After this the dollar strengthened against the euro. The effect of devaluing? The increased demand in global trade markets, spurs higher exports for the devalued currency economy which in return boosts economic activity and drives GD P, growth and development. Only issue in Europe’s sovereign bond crisis was, you guessed right, they’re a net importer of goods. Meaning this would have temporarily boosted goods exporter but the pain of importing goods at a higher cost + increased difficulty to refinance debt outweighed the pros of devaluing the Euro. Austerity Measure Implemented The bailouts provided by the EU and IMF, weren’t free checks. With the lifeline came strict rules, known as austerity measures. Meaning government policies aimed at reducing public sector debt; these policies restricted the fiscal policy actions taken by nations across the EU. Things such as: were reduced/restricted and income taxes were raised to try and shift the current account to positive. The effect? high unemployment rate, greater income inequality and lower standard of living, all which some up the building blocks of fragmentation risk within the euro. Thanks for getting to the end of this note, it was an in-depth piece so make sure you took your time reading through! This piece definitely took it out of me but I know you’ll gain some knowledge from this! A favour to ask, can you share this newsletter on your social media, with your friends and whoever may find value! I’m just about finishing something that’ll really help boost your knowledge so stay tuned! Until next time
Nov 25, 2022 · 7 min read
UK's Autumn Statement Explained.
Hey guys, welcome back to Market Macro Hub! Last week was an extremely significant week economically for the Uk, CPI data, the Autumn Statement, retail sales and even the unemployment figures for Sept. In this piece we break down the ‘alpha’ announcements from the autumn statement and Uk’s market reaction: Enjoy Building The Uk Back (With Higher Taxes…) We’ll start where it hurts the most, (for some). Income Tax. Last week Thursday Jeremy Hunt delivered his Autumn budget covering his fiscal policy plans to bring growth and attraction back to Uk’s financial markets. The most notable change to the higher income earner in the Uk was the reduction of the £150,000 threshold at which taxpayers start paying the additional rate of 45% to £125,140 . For those within this income bracket, discussions on whether a ‘salary sacrifice’, as a means to reduce taxable earnings, have been floating around as workers weigh up the viability of doing so. To bring this into reality, previously, a Uk employee not of retirement age earning £125,140 would take home roughly* £80,227.08 per year. A breakdown of the current tax year 6 April 2022 to 5 April 2023: The result of this hike is that millions more people will be brought into the higher or additional tax bands contributing to the government's need to raise revenue from income tax. Other noticeable changes worth noting: What Did The Markets Have To Say? Well, since the removal of our beloved Kwasi Kwarteng, you can see the bond market has been in favour of Jeremy Hunt. Lower yields are generally associated with lower-risk investments , as opposed to bonds of high yields, commonly known as junk bonds/non-investment grade. A brief reminder that fiscal policy changes can have drastic effects and influence on domestic markets; after the mini-budget, you may recall one of the globally renowned rating agencies Fitch lowered Uk’s bond rating: As aforementioned in a previous article , the rating score of a sovereign bond hugely affects the liquidity available to that economy when financing projects/raising debt. Simply put, the catch is, the lower the investment grade the bond is, the less allocation an institution is allowed to make, due to risk levels associated with the investment. So for sovereigns, a simple downgrade from AA+ to AA- (Fitch rating)significantly increases the perceived risk associated with that country and restricts the capital they can raise as banks/pensions funds/institutions have to rethink their portfolio allocation due to the creditworthiness and rating changing. Hence the massive shake-up in the bond market we had in September. This is due to the Basel III Liquidity Coverage Ratio requirement formed in Switzerland, Basel 2010 and introduced in 2015 globally; after the banking crisis of ‘08 when banks didn’t have enough high-quality liquid assets on their balance sheets to meet immediate liquidity requirements. This is all to emphasise the importance fiscal policy adjustments have when looking into the world of global macro, it’s an easy thing to overlook; especially within your domestic market talk less of globally. I’m an example of that, however, to build depth and broad knowledge within global macro this plays into your investment framework. Here’s my personal viewpoint on Jeremy Hunt’s decision to end the stamp duty land tax; although it seems like a reasonable thought process and policy decision to make at first glance. But, putting a deadline on when you can benefit from reduced/no stamp duty (depending on the home price) surely means inflationary pressure on the housing market in the Uk? This is additional inflation pressure to a housing market already at historically all-time highs when looking at the affordability metric, average household income vs home price. Alarming?! With the deadline in place for 2025, and mortgage rates set to experience volatility both to the upside and downside I’m afraid that we may keep house prices elevated as both first-time buyers and homeowners looking to benefit from the possibility to save on the SDLT reduction. Here’s how the current SDLT policy is looking: I’ll have my eye on Uk home sales in the upcoming months to see what effect this may or may not have when it comes to additional inflationary pressures on the brittle housing market here. As for now, thanks for reading this note ;) Friday we’ll be looking at the Euro Zone crisis and the source of the banking crisis. I need you to do a favour for me macro heads! Send this to someone looking to expand their knowledge, understanding & or skillset— the more this grows, the more value I can deliver for you directly ! It’ll take 30 seconds, these articles have me up until the morning! Until next time
Nov 22, 2022 · 5 min read
FTX Blowout & The Current Macro Picture (Pt3)
Hey guys, welcome back to pt.3 of the current macro picture! Ok, let’s address the elephant in the room… FTX. We’ll dive into the whats and hows of the recent saga with the FTX blowout and the cracks appearing across global markets. FTX, Misfortune Or Blatant Fraud? We had to touch upon this mammoth blowout that transpired over the past week; it’s clear to say that when you’re a 30-year-old with a net worth of $26 billion+ , you pretty much think you can walk on water, or in his case completely put aside ethics and legal rights. And that’s just what Sam attempted; turns out he’s not untouchable. Here’s a deeper breakdown of what happened. As we know it, Sam Bankman-Fried built aka SBF, crypto exchange FTX to a strong point whereby he was being praised by industry veterans and private venture firms like Sequoia Capital , who even wrote a piece proclaiming his excellence. He also built a hedge fund/market maker platform called Alameda, that could make riskier bets within the market due to its nature. Here are the details. During the shakeup of early May this year where it was said to believe that large players within the hedge fund/investment management space (Blackrock & Citadel) borrowed 100,000 bitcoins – worth roughly $2.7b in order to buy UST, only to later ‘test’ the 1:1 peg against the stablecoin and dump all of their UST. This run on the stablecoin caused a colossal loss within the crypto space, sending a number of firms including Three Arrows Capital, a Singapore-based hedge fund, into deep losses resulting in the hedge fund collapsing due to their exposure to the cryptocurrency Luna. Industry reports say the hedge fund’s investment in Luna was $200m and their exposure grew to $560m . The story gets worse trust me. Remember my last article where I mentioned how markets are dominoes in exaggeration; here’s a pure example. The crash in Luna sent Three Arrows (3AC) Capital into liquidation, the issue here was the capital Three Arrows Capital deployed into Luna was a loan from Voyager Crypto (a crypto exchange), the total value of the loan was $670m . Guess what? 3AC defaulted on the loan, which sent Voyager into bankruptcy, after being unable to redeem withdrawals from their customers. Pretty messy, but it gets even worse. After the collapse, SBF purchased Voyager essentially bailing them out. The only issue is, during this saga it’s believed that Bankman’s hedge fund (Alameda Research) had also taken massive losses, his bailouts were hopes to get things back on track with his fund. When looking at the balance sheet of SBF’s hedge fund Alameda what signalled alarm bells was the fact that out of their $14b in assets, $3.66b was FTT tokens (FTX’s coin). So 1/3 of their balance sheet in FTT, an asset owned/created by their sister company which has no inherent value? To assist the lifeline of Alameda Research, Bankman loaned out roughly $6b worth of FTX client funds to the hedge fund to keep them afloat. Questionable move, if you ask me since the role of the exchange, is not to trade/invest/loan customer assets out as if they’re a regulated institution such as a bank. Typically, they should keep a 1:1 reserve of the client’s portfolio and assets, but Bankman went ahead and made the move of funds. Now, for collateral, Bankman’s Alameda Research used FTT tokens (his own coin) as collateral for the loan. Essentially backing the shady loan with no guarantee or safety in a secure or even real asset. Now the value of the tokens held at FTX is a mere $600m!! Compared to the $5.5b figure Bankman-Fried told the public last week. From here, the story is simple, word got out and panic set in— you know what the crypto market is like when there’s smoke and flames… Enough FTT talk, hopefully, that clarifies whatever version of the story you have heard. Let’s talk macro! No Rest For The Wicked, I Mean CPI… Here are the inflation figures as it stands. Figure 3 shows a breakdown, component by component of where inflation is coming from within the Uk. You guessed right. Energy. You can expect to see a similar representation across Europe’s CPI by components. With the U.S being a net exporter of both natural gas (LNG) and oil, its exposure to volatile prices is subdued when compared to the UK & Europe, which is why we’ve seen a recent decline in CPI of 0.5% MoM from September to October ‘22. The implications? A relatively hawkish Federal reserve until we see even bigger declines in the CPI figure. Also noted in my last article, the current macro picture pt.2 , to see inflation fall we’re going to need commodities, particularly oil and gas prices to significantly decline which is why I’m eyeing up a short on USOIL; a bet that as the global economy slips into a recession and with growth/demand being squeezed out the market we’ll see oil reflect the contraction we’ll be experiencing. I believe the state we’re in within global asset markets is the point where all excess wealth created from years of easy returns in equities, private markets and crypto, due to available liquidity is about to be completely erased. You can call it the great reset. This is the largest drawdown recorded in over a century. The question I pose is, have we bottomed out yet? Or are we in the eye of the storm? Years of easy monetary policy, leverage, credit and government spending have tipped the financial world into a danger zone where we’re seeing cracks across different markets in different countries. These are to name just a few cracks within the economy, there’s much more, trust me. One economy we’re going to dissect in an upcoming piece will be the Euro Zone. We’ll look at the crisis starting from the GFC recession till date and what the future ahead looks like in Europe. Thank you for getting to the end! I’ve got a backlog of insights to give you guys, the Autumn Budget recently cited by the Uk Chancellor & a decomposition of the Euro Zone so stay tuned! Quick reminder - If you like my macro insights please do “add to address book” or reply . These are “positive signals” that help my newsletter land in your inbox. Send this to someone who’s looking to expand their knowledge— the more this grows, the better the platform becomes for you in ways you can’t imagine! I’m dedicating myself to ensuring you’re getting all the critical components of knowledge you need to create a deeper understanding of the macro world. Until next time, peace ;)
Nov 18, 2022 · 6 min read
The Current Macro Picture (Pt 2...)
Hi guys, welcome back to pt.2 of the current macro picture. In my last article I mentioned how everything is interconnected; but more importantly how markets catch fire in rapid succession. The domino effect. Zone in as we talk: Commodities . A crucial part of any global macro framework and investment thesis. It is well known that commodities are heavily linked to any period of expansion or contraction ; from my recent tweet , we know that access to credit drives both periods within an economy. Commodities are the building blocks of everything we consume, start off with China, the country that drives synchronised growth, as credit flows into China, the demand for commodities globally strengthens significantly. Even as consumption becomes more digital, we still require commodities to make that digital consumption both possible and available through smarter designed chips which require key elements such as copper. Cyclical Commodities Just for your notes, here are the commodities that you’ll want to keep an eye on during reflationary periods such as 2020: Reflation is controlled inflation , an act of stimulating an economy by increasing money supply , usually a policy driven process. (increase money supply, lower interest rates and boost infrastructure spending) Using 2nd order thinking, what else would benefit from high demand for commodities? Shipping rates! During 2020 we saw shipping rates benefit from a period of relation but majorly shortages within the space. A story for another day. Hopefully you get the point now, commodities are the foundation of everything we have today and will have tomorrow. So why do commodities have a fundamental impact on central bank policy? Glad you asked. We’ll start here. From figure 1, we can gauge how elevated commodities are in the current environment we’re in; coal prices are up 91.6% YTD!! The commodities shown in green all play a direct part into what we see in CPI prints, I’m sure you can connect the dots but let’s go ahead and do so anyway. Starting with agricultural, demand for Wheat currently outweighs the available supply, so what are producers forced to do charge more . Following this chain of goods inflation by the time it reaches our local stores they’re forced to either take a hit on margins due to higher supplier costs or pass this inflation down to the consumer. Meaning CPI can only go higher. That’s only component of inflation, then take a look at energy which has been one of the biggest contributors to double digit inflation within the UK, Europe & multi decade high inflation in the U.S. We’re seeing a minimum of 15.0% price increase across the energy sources required to heat our homes, produce electricity and more. Hopefully you’re starting to get the picture. YTD we have seen equities sell off deep into the red ( -28.0% NDX) , yet the Fed and central banks around the world haven’t stepped in to save our portfolio’s through a pause in rate hikes and QE. For the past decade markets have been accustomed to central bank support via quantitative easing; however this is the new territory for risk-assets where they’re having to weather the storm of global liquidity tightening, higher interest rates and higher inflation. Commodity prices need to crumble in order to help central banks, particularly the Fed, ease up on their monetary policy approach. If commodities don’t retreat to prior average levels then risk-assets will remain under pressure as central banks are forced to keep financial conditions restrictive. A wild statement, but in this period, a recession isn’t enough, commodities need to retreat, as inflation prints shown deflationary like symptoms then we can expect slowdowns and a pivot in central bank policy. Whilst writing this up I took it one step further to compare U.S CPI YoY(consumer price index) against the S&P GSCI index (a benchmark for the commodity market), also the CRB index (a benchmark index for the commodity market) and finally the S&P 500. From Figure 3 you can see the near perfect correlation with both commodity index’s and the CPI rate of change throughout this year; during periods where commodities experienced serious price inflation CPI unsurprisingly followed suit. Moral? If we want to see the global macro picture return to normality, commodities must fall sharply. This leads directly into a trade idea I’ll be eyeing up over Q4, shorts on Crude Oil ETF. We have a major level of support in the highlighted region between $62.00 per barrel and $72.00 per barrel, I’ll be eyeing up shorts as the opportunity presents itself, potential holding period not yet disclosed but as this matures I’ll keep you guys in the loop. Let’s talk dollar. The current macro environment we’re in has sent the DXY to 110.00, up 12.67% for the year. A number of factors have led to this dollar rally: Now, a strong dollar can be good at times; however the flip side of a strong dollar has inflicting effects on the global macro environment. Let’s take a mini tour: One of the main markets affected by a strong dollar is the emerging market. Emerging markets tend to issue debt securities denominated in U.S dollars in order to attract greater breadth of investors since there’s minimal currency risk or exposure when compared to the emerging market local currency. The most critical issues at hand within emerging markets are risks of external debt or balance of payments , countries such as Mozambique, Mongolia, Bolivia and Tunisia are most vulnerable to the risks aforementioned. Since writing this piece CPI for the States came in (yesterday) at 7.7% vs 8.0%. Equities and crypto experienced a boost in risk appetite as investors reacted to the lower than expected inflation print which saw inflation slowing; giving hope that we’ve experienced the peak of U.S inflation which would lead to a relaxation in Fed policy. In our finale, the trilogy, we’ll look at the domino effect I’ve been mentioning time and time again & also the cracks appearing in crypto markets and now transitioning to wider markets in general. Thank you for getting to the end! I won’t lie, as I write this, it’s currently 01:26 in the morning — the beauty of studying macro’s ; ) So I’d appreciate you sharing this in your network, social media and close friends! Tuesday we come back again, pt.3 Until next time
Nov 11, 2022 · 6 min read