With our next Month In Macro soon to release, so we think it is important to contextualize the big-picture. Our takeaways are as follows:
- Growth has accelerated within a broader slowdown that will likely eventually turn into a recession. However, the journey to this destination is likely to be a long one.
- Inflation is likely to remain resilient as nominal spending continues to stay significantly out of equilibrium conditions.
- Liquidity conditions have benefited from less policy tightening and more pro-cyclical liquidity. These conditions will need to change if the Fed wants to achieve its objectives.
Overall, we think we’re in a slowdown that will turn into a recession, but based on current dynamics, we think it will be a very slow process. We do not think we are currently in a recession, but we think the recession risk is currently elevated relative to recent history. Below is our recession risk gauge:
We think this resilience in nominal spending will keep GDP growth modest through 2023, ending 2023 with real GDP growth of 1.2%. We think inflation will stay resilient as our inflation equilibrium monitors continue to show conditions out of whack. Show below are our forecasts.
Below is our high-level inflation equilibrium monitor. Higher values are more inflation pressures; lower values are less inflationary pressures:
The driving factor for whether we go into recession and see sustained deflation is whether profits get a lot worse. We have begun this process but have much further to go:
Turning to liquidity, we think liquidity has been driven up by the slowdown in the policy liquidity drain, and increased private sector liquidity from nominal activity has allowed liquidity conditions to get a lot better. We show policy liquidity below:
As well as how short-term liquid assets have risen:
Within this context, we think stocks are currently a liquidity play more than a growth play. Our attribution of recent returns shows this below:
Our equity view depends on strategy turnover. Strategies nimble to market conditions can be long as our Prometheus ETF Portfolio has been.
On the other hand, our systems have consistently flagged negative conditions for bonds regardless of strategy turnover. Bonds are pricing inflation and a rate path that is inconsistent with economic conditions. Bonds across the curve have too many cuts priced. We show the futures-implied path below:
These expectations extend across the Treasury curve:
Policy-easing expectations, compressed breakevens, and generationally low term premiums point to bonds being rich relative to current conditions.
Within this context, our systems have been well-positioned to profit from resilient economic activity. Over the last week, the Prometheus ETF Portfolio was up by 0.22%. Below, we show the contributions to this portfolio performance across securities:
Turning to next week, our systems are looking to position the Prometheus ETF Portfolio as shown below. The portfolio contains 25 positions heading into next week. We show these below:
POSITIONS: USHY: 11.65% Cash: -8.73% GLD : 8.39% XLP : 7.92% XLV : 7.69% FXE : 6.76% SPX : 6.14% XLI : 5.52% XLF : 5.07% FXB : 4.99% XLB : 4.68% XLY : 4.54% XLK : 4.42% XLC : 4.25% XHB : 3.93% XLE : 3.5% SOYB: 3.09% DBC : 2.56% CANE: 2.52% CPER: 2.26% CORN: 2.25% WEAT: 2.09% SLV : 1.83% USO : 1.4% UGA : 1.29% . Please note if cash position is negative it implies leverage.
Additionally, we show these positions aggregated into asset class allocations below:
The portfolio has a net exposure (ex-cash) of 108.73%, with a gross exposure (ex-cash) of 108.73%. This allocation has an expected volatility of 14.19%, with a maximum expected volatility of 20%. We think the major risks to these positions will come on Friday with nonfarm payrolls. Barring a significant shock in claims data ahead of this, we think it unlikely that we will achieve maximum volatility. We stay nominal growth until we don’t. Until next time.