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.
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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.
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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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The Fed hiked rates above 5%, and yet the US economy hasn't broken yet.
Here is why.
Thread.
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High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and it will have less money for income and spending.
The problem is that people are looking at the ''wrong'' debt.
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Private sector debt levels and trends are by far more important than governmment debt
Contrary to the government, the private sector doesn't have the luxury to print money: if you get indebted to your eyeballs and you lose your ability to generate income, the pain is real
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One day, the US Dollar will lose its global reserve currency status.
And it's going to be a huge event.
But here is some hard truth about the De-Dollarization.
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The big question is ''when''.
And the answer is: most likely not within any tradable horizon!
Here is why an orderly de-dollarization is nothing more than a fairytale.
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In a globalized economic system you want to trade with as many partners as possible in a seamless way.
When Brazil exports its commodities and the trade happens in USD, Brazil accumulates USD – it might also use them to buy goods or services it needs from other countries
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High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and consumption will slow.
High rates were supposed to break the US because of government debt, but that's not how it works.
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Private debt levels instead reveal the true macro fragilities of economies facing higher interest rates.
The private sector doesn't have the luxury to print money: if you get indebted to your eyeballs and you lose your ability to generate income, the pain is real.
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Ever wondered what's like to launch a macro hedge fund these days?
Here are the 7 key insights I got so far:
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A) If you think it will be hard, you are wrong: it will be harder
In the early steps of launching a hedge fund you are required to be the CEO, CIO, COO, head of investor relations, and so on.
It's really hard work.
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B) The package matters
Investors have upped their regulatory/infra requirements, and they understandbly demand you to be fully regulated/compliant/audited and have a solid trading infrastructure with a strong prime broker.
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