"The real opportunities in macro, you have to wait for. You don't always have to be doing something.
Having lived a few of these markets before, you have to be very careful because you can lose P&L very quickly by getting too excited."
--Raoul Pal, 10/9/2020 RealVision Daily Briefing
Raoul is RealVision's founder and CEO, and one of today's great macro thinkers. Of course I'm quoting him today because, as clients and regular readers know, his comments echo our present thinking...
This week marks the second consecutive improvement in our macro index's net overall score; rising 2 points to -10.
One of our inputs moved from negative to neutral, while the rest essentially held steady (although per the following, a few are starting to look suspect).
That one gainer was the Bloomberg Commodity index:
"Given all that’s evolved over the past several decades, given the complete carry-dependent state of the global economy, there’s only one road for the powers-that-be to take going forward; a steady, unrelenting debasement of the US dollar.Have a great weekend!
Virtually everything the Fed has signaled since the fallout in Q4 2018 assures that all appetite for volatility has been essentially purged from their thought processes. COVID, ironically, has given them -- they presume -- complete cover to get the ball rolling sooner and more aggressively than what otherwise may have occurred. I see zero question that they’ll completely change their narrative/policy on inflation going forward, and engage in direct yield curve control indefinitely.
The treasury will issue debt without restraint and the Fed will purchase it likewise, indefinitely.
Commodities -- gold especially -- are the most obvious trade under these circumstances. US equities stand to ultimately benefit as well, however -- and this will produce great anxiety for the Fed along the way (due to extreme global carry) -- with bouts of extreme volatility, given the unavoidable economic stagnation such a scenario creates, and the potential for huge political disruption -- regulation, taxation, etc. -- as growing income/wealth inequality continues unabated (exacerbated, in fact) going forward.
Foreign market equities, emerging markets in particular, stand to outperform the US markedly for several years to come; but we -- while we anticipate adding there incrementally in the near-term -- are going to let the COVID situation and the coming election play themselves out before we go there in a big way.
The immediate question for equity markets being, given the abysmal state of macro affairs, political risk, geopolitical risk and so on, will there be the 50+% correction that will reset valuations, etc., to the point I believe necessary for the US market to recapture any semblance of a “fundamentally” investable setup -- at all or anytime soon? Bottom line; that risk is there, which demands that we hedge our equity exposure against a major drawdown either until one occurs or until the risk abates…"