Thread by @MacroAlf

I am so glad to be back!

Let me share with you my main tools to navigate markets: The Macro Compass.

It's a cross-asset allocation tool that serves as a big picture indication of what's coming next, and it helped me generate excess risk-adjusted returns over the years.

1/10

The Macro Compass is a 4-quadrants asset allocation tool, which uses two main inputs: the global credit impulse and the relative monetary policy stance.

The global credit impulse is my prop indicator that measures the pace of growth of credit creation amongst G5 economies

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Credit creation is the real ''money printing'': when credit gets extended, new money is created out of thin air and handed over to the private sector

Commercial banks (net lending) and governments (net fiscal spending) are responsible for the lion share of credit creation.

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A positive (or negative) credit impulse will generally show up in strong (or weak) soft/hard economic indicators with a 5-9m lag and in asset class performance with a 6-12m lag.

An old chart below as an example - I am updating the database as we speak.

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The other input for The Macro Compass is the relative monetary policy stance amongst the largest economies in the world.

This is captured via a blend of short-term and medium-term measures of real yields against my proprietary estimate of the neutral real interest rate.

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The neutral real interest rate (r*) is the inflation-adjusted rate at which the economy would operate at equilibrium, potential levels without overheating or excessively cooling down.

When observed real yields < r*, the relative monetary policy is easy and vice versa.

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Every time observed real yields traded 50-100 bps above equilibrium (r*), risk assets became vulnerable and risk-off episodes happened

Also in this case, absolute levels matter but the direction of travel and the speed of change of the relative policy stance are important

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The Macro Compass has been unambiguous about its asset allocation signals: back to secular quadrant 1, fade the cyclical hype.

And rightly so. Since May 2021:

$TLT +10%
$QQQ vs $IWM +20%
$SPX vs $EEM +20%

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Where do we stand now?

Credit creation is still decelerating and the relative monetary policy stance remains easy but the direction of travel is changing quickly.
Hence, The Macro Compass still points to the secular Quadrant 1 but bouts of risk-off are increasingly likely.

9/10

I will soon release my comeback article on The Macro Compass, where I will provide additional macro insights and look at investment ideas.

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TheMacroCompass.Substack.Com