Thread by @Trinhnomics

Good morning 🌻 - light Asia day (Korea consumer confidence slowed to 97.5 from 97.9 (no surprise here); tonight US new home sales & consumer confidence.

China enterprise data out 27 & Xi & Trump maybe dining over🐙 takoyaki (my fav street food) in Osaka & June manu PMI 30.

Some of my followers ask, why bother studying economics if markets are divorced from economics? Actually they don't. But when you look at data, u have to know whether: a) data lagging? GDP very lagged, Exports lagged by 1 month unless u're Korea (Phils 3months, then coincidental

So if data is lagging, what can you learn from it? You can learn about the past, which has clues about the present & the future, such as investment, imports, etc. Also the past tells u the future of debt affordability (if earnings/growth decline, then u know that the future is..)

Macroeconomic decisions are made By the micro (people, firm) & these people make decisions based on the PAST, PRESENT & expectations of the future. So we must at least know the PAST to understand the present & then forecast their EXPECTATIONS OF THE FUTURE & economic decisions.

If u look at the BIS report I showed u yesterday, there's nothing there that is COINCIDENTAL - all are of the past - but it is VERY TELLING. Data takes time to collect, clean, publish etc. The BIS takes data from countries & so usually lagged by 1 to 2 QUARTERS. But very useful.

So if u know that US households DELEVERAGED & ability to SERVICE debt FINE vs Canada for example, then when u think about the present & future u know that US consumers more likely to have confidence than Canadians due to stronger fundamentals. Of course w/ pockets of weakness ...

In other words, it is important to not just follow headlines/high frequency data but also to understand the FUNDAMENTALS & structural aspect of an economy to differentiate structural & cyclical even if the data is VERY LAGGED. Tells the long-term trend of an economy in the future

Spent a lot of time posting charts on China & how leveraged it is & then u see that it rallied in Q1 & u get disheartened b/c the data is bad. But zoom out. SHCOMP hasn't rallied. And u also know that the next stage for China is putting a floor on growth & ultimately DELEVERAGING

So if u're day trading on my good mornings of Asian data, u need to think holistically & have views on FUNDAMENTALS & also understand the following: a) speculative appetite; b) liquidity (central banks/fiscal policy).

Btw, most data is either LAGGING OR COINCIDENTAL AT BEST.

b) What is coincidental data? It is tell u the present. Like NOW. Usually that is like money market, pricings, etc. Maybe even PMI flashes but that contains somewhat the past. People spend a lot of time saying that they have LEADING INDICATORS (usually something new new orders).

c) What is a leading indicator? Data that tells you about the FUTURE. The best leading indicator is STOCK PRICE. It leads. Now, u're like, how am I supposed to make money if the market is already priced in the future & thinking about what's not priced in is a difficult exercise.

The OECD has a leading indicator. It is pretty good. Now the issue is that this leading indicator is NOT USE-ABLE IN MARKETS. Why? Because say u're in end of June - they usually have only March data so by the time they publish of what the "lead" is, we're already onto July 🤗

Nowcasting data that u see (Atlanta Fed) is not leading - they are at best coincidental or lagging using high frequency (monthly) to predict quarterly GDP data.

So u ask, what is a good leading indicator? Some people try to look at financial conditions to lead economic activity.

We have something called NXMCI - basically called monetary conditions. Have been helpful for my calls of Asian central banks but more helpful for some economies than others. Not to brag but we called the cutting cycles before most. Made FCIs but never published. The IMF has that.

U're like what is the financial condition index? It's like the augmented version of an MCI. 1st, let's talk about MCIs. U need real of everything so need to wait for CPI to come out. The issue is Australia has only quarterly CPIs & Malaysia super late. Good but could be better.

If MCIs are just a summation of real interest rates (nominal rate minus CPI) & real effective exchange rates (REER) then FCIs add the extra component: Risks! So if u look at the St Louis FCIs or IMF or any of those, then they are basically adding more money market stuff & spreads

Some have like >20 components & the math behind it is pretty simple: 1st have to normalize the data b/c they can range in volatility; then u use something like PCA to determine ones that are key & that determines the weight or u can use VAR. But a fancy way to do weighted sum.

Here is the St Louis Financial Condition Index 👇🏻, which is -1.2, which is VERY VERY LOOSE, which means it is SUPPORTIVE OF GROWTH. Okay, u're like what does that mean? I just explained to you that they take things like credit spread, VIX etc to determine this & not that complex.

How you should interpret the index👇🏻. As a rule of thumb, whenever you read the news/experts commentary, NEVER TAKE WHAT THEY SAY AT FACE VALUE if u don't understand terminology. If u do not understand what an FCI is, then read the appendix. The Fed is very good at explaining👇🏻

If u don't know what a credit spread is, credit = costs of company to borrow by issuing a bond. A bond is often rated (not always); AAA is super good & obv there is super JUNK & priced accordingly. Spread tells u the diff b/n quality &junk & when widens then there's risk aversion

Natixis Monetary Condition Indices. We published in Nov 2017 & already saw that India was the tightest & India had to hike in 2018 despite already high RIR & it cut in 2019 as soon as JPO turned dovish 👌🏻