It’s Not Complicated, We’re Headed For A Recession… [DIRTY DOZEN]

In all markets, price extremes are usually attended by a consensus that the trend, be it up or down, will continue; and by a peak of speculation in line with the trend. Hence the excruciating paradox of financial markets, that sentiment is most bullish at the peaks when prices have only one way to go which is down; and most bearish at troughs vice versa: at the top there’s no-one left to buy, and at the bottom no-one left to sell. ~ John Percival “The Way of the Dollar”

In this week’s Dirty Dozen [CHART PACK], we look at the growing list of recessionary leads setting off alarms, then dive into inflated profit margins that are set to have the air let out before chatting funds dumping the mega caps. Then we talk currencies and what makes them move and walk through the bull case for select EMFX, plus more…

  1. Conference Board’s LEI is down six months in a row and flipped negative on a YoY basis last week. This is a high-fidelity recession indicator and aligns with what our other leading indicators are signaling. Average annual market returns are below -11% when the LEI is below zero and falling.

  1. CS’s leading indicator composite also points to a recession starting sometime next year.

  1. The following is from Bridgewater’s Liquidity Hole note published last month.

“Fiscal transfers to households more than offset the loss in private incomes during the shock, allowing households to maintain their spending power. A result of this was that US corporations were able to collect higher revenues from the household sector without paying correspondingly higher wages—again, only because these workers were subsidized by government stimulus transfers (borrowing that was monetized by quantitative easing). This caused profit margins to balloon and elevated corporate cash flows. As this stimulus wears off and fiscal spending pulls back, there is significant pressure for corporates’ profit share to normalize in an environment where private sector wages are rising.”

  1. And again from BW, “US equities are now down over 20% this year but are not pricing in the degree of real economic weakness we think is likely. The left chart below illustrates how, adjusted for discount rate changes, US equity returns would be close to flat this year. The chart on the right shows the priced-in EPS growth for US equities, which remains quite strong.”

  1. We’ve been writing all year about how ridiculously optimistic earnings estimates were relative to the data leads we were seeing. Well, those estimates, in the US at least, are finally being revised lower.

  1. The ten largest stocks in the SPX account for roughly 28% of the index, which is near its all-time high. What’s interesting is that funds have been dumping these names in en massed since December of last year.

  1. A lot of macro trading is boring work; running your systems, protecting your book, and playing defense, biding time until you start to see some stars align. One of the setups I’m most interested in is the short USD trade and its parallel plays (long PMs, long energy, long select EMs). We’re still maybe a few months from the setup triggering (we’re long USD pairs at the moment), but it behooves you to track this one closely.

Here’s Soros’ Currency Framework and our Precious Metals Framework as a primer.

  1. GBPUSD is roughly 4stdev below its 24-month moving average and nearing its all-time low, last hit in 1985. We don’t step in front of steamrollers, so we’ll be waiting for the tape to put in a reversal. But we’re interested in this name on the long side.

  1. Relative growth drives relative market performance, which drives capital flows and ultimately moves currency pairs in a giant reflexive loop. This chart from CS shows that the relative GDP momentum is moving in EM’s favor against that of the US.

  1. Emerging markets are also very cheap on both an absolute and relative basis (chart via CS).

  1. While EM vs US real yield diffs are at highs (chart via CS).

  1. I’m incredibly bullish on precious metals over the next 2-4 years. We’re transitioning into a macro regime that has all the ingredients necessary to drive a massive bull market in PMs. Gold typically bottoms well before equities in a cyclical bear market. But they also tend to sell off in the earlier stages of a broader market crash.

I think the current breakdown will end up forming a large bear trap. However, price is price, and this pattern is very shortable. The measured move target is 1,350.

Thanks for reading.

Stay frosty and keep your head on a swivel.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.