TMC Monthly Call - June 2023

New Section

The speaker introduces themselves and asks if the audience can hear them.

Introduction

• The speaker greets the audience and asks for confirmation if they can be heard.

• They mention their humorous t-shirt.

Making Sense of "Higher for Longer" and Inverted Yield Curves

The speaker addresses a question about the concept of "higher for longer" in relation to inverted yield curves.

Understanding "Higher for Longer" and Inverted Yield Curves

• The speaker explains that the market has been pricing in a tighter Fed for as long as possible until something breaks, resulting in the concept of "higher for longer."

• They clarify that inverted yield curves make sense because the market believes that at some point, the Fed will break something, leading to an inversion in curves.

• The speaker mentions that markets are always trying to price in a reasonable period where the Fed will remain tight, typically one year. After this period, there is often a recession or a breaking point.

Potential Recovery after Regional Bank Crisis

The speaker discusses whether there is potential for recovery after the regional bank crisis.

Recovery after Regional Bank Crisis

• The speaker reflects on their previous analysis of the regional bank crisis and how it was primarily a liquidity issue rather than a credit situation.

• They explain that while liquidity situations can be addressed by the Federal Reserve, credit issues cannot be easily resolved by them.

• The speaker notes that regional banks currently face both asset quality and funding problems. They highlight the challenge of funding at a higher cost due to treasuries being posted as collateral.

The transcript provided is not in English, so the summary has been written based on the timestamps and limited information available.

Challenges for Regional Banks

The speaker discusses the challenges faced by regional banks in terms of loan yields, funding costs, and attracting depositors.

Loan Yields and Funding Costs

• Regional banks have lower loan yields on their assets.

• They are forced to pay five percent to the Federal Reserve for funding in exchange for treasuries.

• To attract depositors, they need to offer higher yields.

• This leads to margin compression and deterioration in asset quality.

Premium on Regional Bank Credits

• The market attaches a premium to regional bank credits due to the prolonged period of headwinds ahead for these banks.

• However, the speaker does not take a particular stance on being outright short on regional banks.

Increased Exposure to Bund ETF in European Portfolio

The speaker explains why they have increased their exposure to the Bund ETF in their European portfolio.

Value of Boons

• Boons at a two and a half percent yield offer decent value in Europe over the long term.

• The speaker believes that even if the ECB tries to talk yields higher, inflation and recessionary trends in Europe are likely to bring yields lower.

Risks of Yen Appreciation and Affected Assets

The speaker discusses the risks associated with a fast and sudden appreciation of the yen and its impact on different assets.

Yen Appreciation Risks

• There are two ways the yen can appreciate: Ministry of Finance intervention or structural factors like changes in yield differentials or global recession.

• Ministry of Finance intervention involves selling dollars into the market to stem yen depreciation.

• Structural factors like changes in yield differentials or global recession tend to shrink yield differentials between yen and other currencies, leading to yen appreciation.

Affected Assets

• A fast and sudden appreciation of the yen would impact assets that are funded using yen, as the cost of borrowing yen would increase.

• Carry trades involving shorting the yen and buying other currencies would be affected if yield differentials decrease due to a global recession.

The transcript provided is in English.

New Section

This section discusses the potential removal or change of the yield curve control in Japan, which could lead to higher yields and benefit the yen.

Currency Hedging for European Investors

• European investors looking to hedge currency risk when investing in US ETFs or stocks like the Polish slotty face a valid concern.

• The US ETF portfolio is recommended as the most relevant option, but it comes with an embedded currency risk for non-US investors.

• Hedging currency risk is expensive and may not add significant value over time, especially for long-term investors.

• While there may be short-term variability, over longer periods of time (4 to 5 years), the impact of FX tends to be more muted.

• Long-term investors are advised to consider currency risk as an additional layer of risk but not pay extreme attention to currency risk overlays.

New Section

This section explains the strategy behind running ETF portfolios with a focus on specific regions and currencies.

Barbell Strategy for ETF Portfolios

• The current strategy involves a barbell approach with equity exposure in regions where there is favorable currency and growth prospects, such as Latin America, Poland, and Japan.

• This equity beta is balanced with a strong bond allocation that remains the core position in the portfolios.

• The choice of specific ETFs, like those focused on Brazilian Real or Polish naughty, includes embedded exposure to these currencies for their potential benefits in terms of equity beta and value from emerging markets.

New Section

In this section, the speaker discusses obtaining data for building credit impulse indicators.

Data Collection for Credit Impulse Indicators

• Building credit impulse indicators requires collecting data from various sub-indicators in the five largest economies.

• The speaker has a methodology to transform and combine these sub-indicators into a comprehensive credit impulse indicator.

• Downloading data from sources like Bloomberg may not provide accurate or complete credit impulse indicators.

• The speaker will publish monthly updates on the credit impulse series and plans to release a macro database with leading and coincident indicators.

New Section

This section addresses the management of timing for trades in ETF portfolios and tactical trades.

Managing Timing of Trades

• Timing is always an interesting topic, as it is difficult to predict which trades will be successful.

• To skew the odds in favor, several indicators are considered when determining timing for trades.

• The approach to timing may differ between ETF portfolios and tactical trades, but the goal is always to increase the probability of success.

New Section

In this section, the speaker discusses the importance of risk management and proper position sizing for increasing profitability in trading.

Sizing Positions and Risk Management

• Proper position sizing and risk management are crucial for tactical investors.

• Volatility-adjusted position sizing is important for determining how many ETFs or future contracts to buy based on risk management criteria.

• A position should have a set stop loss and a trailing profit target to manage emotions and minimize risks.

• Risk management and position sizing are more important than trying to time market entry perfectly.

Timing Relevance

• Timing is less relevant in portfolio management with a 12-month time horizon.

• Correlations and probability-weighted scenario analysis play significant roles in risk management.

Terminal Rate Duration

• The terminal rate duration is typically set between 9 to 12 months forward, but there is no quantitative explanation for this preference.

• Setting the terminal rate further ahead allows more time to assess predictions accurately.

Position Size Repetition

• It can be valid to repeat a trade after being liquidated if there are reasons to do so.

• Some traders prefer putting up a proxy trade instead of repeating the exact same trade after being stopped out.

Pair Trade Sizing

• Pair trade sizing is a complex topic that involves considering correlations, beta adjustment, volatility adjustment, and implied probabilities.

• The speaker plans to write about pair trade sizing along with option sizing in the future.

Recession Prediction

• The NBER generally calls for a recession about six to seven months after it has started.

• The speaker had predicted a recession starting by the end of June based on available data at that time.

New Section

The speaker discusses the possibility of a recession and the resilience of the housing market.

Recession Outlook

• The speaker's base case is that a recession will occur in June this year.

• There haven't been any significant changes to alter this outlook.

• Housing has been surprisingly resilient, contrary to expectations.

• Employment related to housing is a leading indicator for overall employment.

• Despite weak housing activity at the end of last year, there haven't been many layoffs in housing-related employment.

• Manufacturing and transportation sectors are already in recession, but services sector and employment are not yet affected.

• The speaker believes that macro lags will kick in and lead to a recession eventually.

New Section

The speaker addresses concerns about being early with recessionary calls and potential arguments against the recession theory.

Being Early with Recessionary Calls

• Many people in the industry cannot afford to be early with economic projections due to investor expectations for short-term performance.

• Data-driven macro analysis suggests that assuming something is different this time and avoiding a recession should not be someone's base case.

Arguments Against Recession Theory

• The resilience of the housing market could invalidate the recession theory if it continues without weakness. Historically, recessions have been associated with housing weakness.

• A structural change where consumers, corporates, and households can bear higher equilibrium interest rates without affecting income and wage growth could also invalidate the theory. However, such changes are currently unlikely.

New Section

The speaker explains their base case scenario for nominal growth in the US and plans for future courses on various asset classes.

Base Case Scenario

• The speaker's base case is that nominal growth in the US will continue trending down, affecting both real growth and inflation.

• As the macro lags from previous monetary policy tightening start to kick in, there is a higher probability of a recession.

Future Courses

• The speaker plans to release a fixed income course soon, followed by courses on bonds, forex rates, commodities, and equities.

• The first course will focus on the bond market, which is considered the most important and mysterious asset class in macroeconomics.

New Section

In this section, the speaker discusses upcoming courses on monitoring mechanics, analyzing central bank balance sheets, and global macro asset classes.

Courses on Monitoring Mechanics and Analyzing Central Bank Balance Sheets

• The speaker plans to offer a course on monitoring mechanics of real economy money against financial money.

• Another course will focus on analyzing central bank balance sheets and estimating the amount of money the private sector receives.

Course on Global Macro Asset Classes

• The speaker intends to provide a course that covers various global macro asset classes such as bonds, equities, FX (foreign exchange), and commodities.

• The goal is to share knowledge accumulated from working at a big bank through video presentations with supporting materials for enhanced education.

New Section

In this section, the speaker addresses the risks associated with long-term bonds in relation to potential adjustments in Japan's yield curve control.

Risks of Long-Term Bonds and Yield Curve Control in Japan

• If Japan adjusts its yield curve control policy to allow for higher yields, Japanese investors may stop investing in foreign fixed income markets like European fixed income markets.

• Japanese investors have an alternative option of investing in higher-yielding Japanese government bonds without taking foreign exchange risk.

• However, it is important to consider that Japanese investors typically hedge foreign exchange risk when investing in foreign bonds. Therefore, it is not solely about yield differentials but also about hedging costs.

• It is crucial to avoid overestimating the impact of one single dynamic (curve control) on the treasury market. The treasury market is vast and influenced by multiple factors beyond one buyer or seller.

New Section

In this section, the speaker explains why treasuries are considered safe and liquid collateral globally due to their role in the international trade system.

Importance of Treasuries as Safe and Liquid Collateral

• Treasuries are considered the safest and most liquid collateral in the world.

• When conducting international trades, such as selling soybeans from Brazil to China, transactions are often invoiced in dollars.

• As a result, Brazilian corporations receive dollars that they deposit in banks. The banks then invest these dollars, typically in treasuries.

• The demand for treasuries stems from the need to recycle dollars generated by global trade. This demand is driven by treasuries being safe and liquid assets.

• It is essential to consider the systematic demand for dollars and treasuries when analyzing risks or potential adjustments in the treasury market.

New Section

In this section, the speaker provides a preview of their "forever portfolio" project, which aims to extract risk premiums from markets using ETFs.

Introduction to the "Forever Portfolio" Project

• The speaker is working on a project called the "forever portfolio."

• The goal is to create a portfolio that can extract risk premiums from markets regardless of prevailing macro regimes.

• The portfolio will consist solely of ETFs (Exchange-Traded Funds), with potentially a few leveraged ETFs but no options or futures.

• The approach is based on the observation that between 2011 and 2019, there was one dominant regime (inflationary growth U.S.-dominated) where a traditional 60/40 portfolio performed exceptionally well.

• However, historical analysis shows that geographical diversification and exposure to emerging market bonds or equities could have outperformed during other periods.

• The aim is to build a reliable portfolio that can adapt to different macro environments while utilizing ETFs only.

Due to limited information provided in the transcript, further details about specific strategies or components of the "forever portfolio" are not available.

New Section

In this section, the speaker discusses their approach to portfolio management and the inclusion of macro analysis. They also mention upcoming releases and introduce the concept of the "forever portfolio."

Applying Macro Analysis to Portfolio Management

• The speaker applies macro analysis from macro Compass models and analysis to their portfolio.

• This combination leads to exciting results.

• The speaker plans to release a piece in a few weeks introducing the audience to their portfolio.

New Section

In this section, the speaker addresses a question about Southeast Asian markets, specifically Vietnam.

Southeast Asian Markets, Particularly Vietnam

• The speaker acknowledges that Southeast Asian markets, including Vietnam, have promising demographics.

• Geographical diversification in equity markets is important for the forever portfolio.

• Emerging markets like Vietnam and other regions such as Poland and Latin America are interesting places to look for potential returns.

New Section

In this section, the speaker responds to a question about aggregate corporate credit expires and refinancing needs.

Aggregate Corporate Credit Expires and Refinancing Needs

• The speaker agrees that considering aggregate corporate credit expires can help anticipate refinancing needs.

• They mention that they have overlooked this aspect in their analysis but are now taking it into account.

• The significant amount of money creation in 2020 and 2021 includes long-term credit creation such as mortgages and corporate bonds with delayed refinancing needs.

• Timing plays a role in refinancing needs for corporates, especially high yield leveraged loans private credit.

• As time passes, more urgent refinancing needs may arise for corporates facing higher interest rates during refinancing.

New Section

In this section, the speaker briefly comments on commercial real estate markets.

Commercial Real Estate Markets

• The speaker admits not being a specialist in commercial real estate and not having done in-depth analysis.

• Vacancy rates in Canada and the US are rising, indicating unfavorable economics for commercial real estate.

• Overall, the speaker does not see a great story in commercial real estate markets.

New Section

In this section, the speaker addresses questions about their availability for weekly updates and their views on South American, Japanese, and Polish markets.

Availability for Weekly Updates and Market Views

• The speaker mentions that due to the extensive analysis and writing involved, they do not have time for weekly updates.

• They explain that exposures to South American, Japanese, and Polish markets should be seen as part of a portfolio.

• Latin America and Poland are favored due to their growth stories, favorable terms of trade, strong currencies, embedded carry trades, and attractive valuations.

• Japan has super accommodative policies compared to nominal growth performance. Japanese equities also trade at decent valuations.

• These market views are part of a portfolio strategy with both equity beta exposure and bond beta exposure.

New Section

In this section, the speaker responds to a technical question about calculating debt scores for determining stop loss levels.

Calculating Debt Scores for Stop Loss Levels

• The speaker admits not understanding the question fully and asks for clarification.

• They express willingness to answer once they understand the question better.

New Section

This section discusses the EU portfolio and its restrictions on U.S intervention, as well as the potential impact of yen appreciation and global recession on different asset classes.

EU Portfolio Restrictions

• The EU portfolio is primarily for individuals who are restricted from accessing U.S intervention.

• It does not have much pass-through to other asset classes.

• Ministry of Finance interventions can cause idiosyncratic reactions, but no structural changes occur.

Impact of Yen Appreciation

• If the yen appreciates due to yield curve control changes, it can have a different impact.

• Global bonds may experience some negative effects, but it doesn't significantly affect other asset classes.

Global Recession and Asset Classes

• In the case of a global recession, the impact on asset classes would be different.

• The discussion shifts towards a completely different story.

New Section

This section briefly mentions technical difficulties and moves on to answering questions about AI and recommended books.

Technical Difficulties

• The speaker checks if everyone can still hear him due to a computer disconnection issue.

AI and Short-Term Perspective

• The speaker doesn't have a particular short-term take on AI.

• He suggests playing short-dated options to fade excessive enthusiasm in this super technical market driven by animal spirits rather than fundamentals.

Recommended Books

• A question is asked about a list of recommended books mentioned in a Twitter thread.

• The speaker considers including the list at the end of his next piece for easy access.

New Section

This section addresses the question of whether the speaker believes in structurally higher inflation and discusses various factors that could contribute to a potential increase in inflation over the next decade.

Structurally Higher Inflation

• The speaker clarifies that he doesn't believe in structurally higher inflation.

• However, he acknowledges the possibility of a long-term trend towards higher inflation over the next decade.

• Factors such as deglobalization, shrinking Chinese workforce, worsening demographics of cheap labor providers, and political shifts may contribute to this trend.

Applicability for Investment Purposes

• Many people tend to overlay the structural inflationary narrative with short-term cycles.

• In this cycle, inflation is expected to decrease.

• As inflation converges back to the Federal Reserve target, the correlation between bonds and equities becomes negative again.

• The speaker emphasizes that managing short-term cycles is more important for risk management as a macro investor.

New Section

This section briefly mentions looking at second questions before moving on.

Second Questions

• The speaker mentions having a look at the second set of questions.

New Section

The speaker discusses the inverse correlation between the S&P and five-year Real Deals, speculating whether it is due to an attempt to anticipate Fed recessionary cuts or simply FOMO (fear of missing out) in the stock market. The speaker believes it is primarily driven by FOMO.

Inverse Correlation and FOMO in Stock Market

• There seems to be a broken inverse correlation between the S&P and five-year Real Deals.

• Speculation arises whether this is an attempt to anticipate Fed recessionary cuts or simply FOMO in the stock market.

• The speaker, being an institutional investor, provides perspective on this matter.

New Section

The speaker shares their experience as an institutional investor during a period of recessionary trades and how it affected portfolio performance.

Impact of Recessionary Trades on Portfolio Performance

• In January, adding portfolio positions for recessionary trades did not result in significant losses but also did not generate substantial profits for the first four to five months of the year.

• In April and May, when the market started rallying, those who focused on recessionary trades were left behind.

• Long-term investors may not be greatly affected by this, as they have a macro allocation process that takes time to play out.

• However, institutional investors with stakeholders and risk managers cannot go too long without showing performance, especially when the market is running. This feeling was exacerbated in May and June when the market roared higher.

• Institutional investors had to chase the market higher even if they didn't want to participate in the rally.

New Section

The speaker explains why chasing higher market prices becomes necessary for institutional investors despite their reluctance.

Chasing Higher Market Prices

• The feeling of needing to show performance becomes strongly exacerbated when the market roars higher.

• Institutional investors have to chase the market higher, even if they don't want to participate in the rally.

• This behavior is driven by the pressure from investors, risk managers, and stakeholders.

New Section

The speaker discusses how chasing higher market prices contributes to the broken correlation between the S&P and five-year Real Deals.

Broken Correlation and Chasing Higher Market Prices

• The broken correlation between the S&P and five-year Real Deals can be attributed to institutional investors being forced to chase higher market prices.

• Even if they don't want to participate in the rally, they have no choice due to pressure from investors, risk managers, and stakeholders.

New Section

The speaker addresses a question about important leading indicators used in their analysis.

Important Leading Indicators

• A new tool called the macro database tool is being developed. It will list all the speaker's leading indicators, updated weekly or monthly.

• This live tool will allow users to interact with and analyze the data themselves instead of relying on PDF presentations.

New Section

The speaker responds to a comment about escalating U.S.-China trade tensions and its impact on inflation returns.

U.S.-China Trade War and Inflation Returns

• Geopolitics, including trade tensions between the U.S. and China, are important drivers for structural changes over the next decade.

• Inflation might average higher levels than in the previous decade due to these factors.

• However, in the short term, it is unlikely to significantly impact markets or inflation expectations during this cycle.

New Section

The speaker shares their perspective on UK markets, inflation, and guilds (UK government bonds).

UK Markets, Inflation, and Guilds

• The speaker attempted to invest in UK bonds versus U.S. bonds but it hasn't worked out so far.

• The market is pushing the Bank of England terminal rate higher, indicating increased expectations for interest rates.

• Leading indicators for the UK suggest that inflation will also impact the country.

• For long-term investors, 10-year guilds at four and a half percent can be a decent buy. However, tactical traders should respect their stop loss as they may get stopped out from this trade soon.

New Section

The speaker discusses the narratives monitor tool and its calculation method.

Narratives Monitor Tool

• The narratives monitor tool is designed to track different narratives in the market.

• Developing this tool requires significant coding and data analysis.

• Due to the ever-changing nature of narratives, it is challenging to program it as a tool.

• Instead, the speaker updates and shares the tool every one or two weeks with percentile calculations.

New Section

The speaker addresses a question about closing a short position on Russell.

Closing Short Position on Russell

• Trades on ETF portfolios should be viewed as part of an overall portfolio strategy rather than individual trades.

• It's important to consider the performance of the entire portfolio when evaluating specific trades.

New Section

In this section, the speaker expresses their appreciation for the monthly sessions and the opportunity to chat with the audience. They mention that it's nice to have conversations rather than just exchanging emails.

Appreciation for Monthly Sessions

• The speaker expresses gratitude for the monthly sessions and enjoys chatting with the audience.

• They appreciate the opportunity to have conversations instead of relying solely on email communication.

New Section

The speaker continues to express their appreciation for the monthly calls and mentions that they will provide an update on a tactical piece in either Sunday or Friday's session. They also highlight the importance of covering the labor market report.

Update on Tactical Piece and Labor Market Report

• The speaker appreciates talking to the audience during the monthly calls.

• They plan to provide an update on a tactical piece, possibly on Sunday or Friday.

• Mention is made about covering the labor market report, which is considered very important.

New Section

The speaker concludes by expressing their enjoyment of this course and looks forward to connecting with the audience again next month.

Conclusion and Next Month

• The speaker expresses their enjoyment of this course.

• They look forward to connecting with the audience again next month.