Macro Data Screener - 8 April 2023

Introduction

The speaker introduces the topic of macro data screener and deep dive video, which focuses on real economy money printing and financial money printing. They explain how both these drivers affect the economy and asset classes.

Definition of Real Economy Money Printing

• Real economy money is the money that households, people, and corporates use to spend in the real economy.

• Commercial banks and governments create this type of money through credit creation or new loans.

• Commercial banks create new deposits when they make new loans, which increases their balance sheet's assets and liabilities.

Government Deficits Create Money

• Government deficits also create real economy money by increasing private sector net wealth.

• Tax cuts and pandemic checks are examples of government deficits that increase private sector net wealth.

• When the government runs a deficit, the private sector runs a surplus, as shown in a chart from 1990 to 2020.

Real Economy Money Creation Rate

• The credit impulse index shows that we are not creating additional real economy money on a rate-of-change basis in the five largest economies globally.

• If you stop creating real economy money, growth will come down, leading to an earnings recession.

Correlation Between Money Creation and Earnings

• There is a positive correlation between creating more money and increased earnings within nine months.

Conclusion

The speaker concludes by discussing what all this means for growth and earnings.

Outlook for Growth

• Expect growth to surprise negatively on the downside in the next few quarters due to negative rates of change in real economy money creation.

Outlook for Earnings

• The more money you create, the more earnings will follow within nine months.

Real Economy Money Printing vs Financial Money Printing

In this section, the speaker discusses the difference between real economy money printing and financial money printing. He explains how they are different and how they affect GDP growth, earnings, and unemployment.

Real Economy Money Printing

• China heavily relies on credit creation to boost its economic growth.

• The US has had a money hangover after the pandemic, resulting in less credit creation.

• Credit creation in the US is at the same low levels as it was before the great financial crisis.

• Developed markets such as Europe, UK, and Japan are seeing very negative real economy money printing numbers.

Financial Money Printing

• Financial money printing is done by central banks and gives more money to the financial system.

• Banks have more liquid balance sheets which allow them to take more risks.

• QE is one of the most known ways to print financial money.

Quantitative Easing (QE)

In this section, the speaker explains what happens with QE. He describes how central banks increase their balance sheet size through QE and how commercial banks' balance sheet composition changes when they participate in QE.

What Happens with QE?

• Central banks increase their balance sheet size through QE by creating bank reserves out of thin air with which they buy bonds.

• Commercial banks' balance sheet composition changes when participating in QE. Bonds are taken away by central banks and put on their balance sheets while Banks reserve more reserves.

Financial Money Printing

In this section, the speaker discusses financial money printing and how it is not limited to quantitative easing (QE). The treasury general account is also a factor in financial money printing.

Treasury General Account

• When the US government spends down its account at the Fed, the treasury general account (TGA) goes down.

• This spending increases the amount of net worth that people have, which results in equity going up and more bank deposits for US citizens.

• However, the TGA is a liability of the Federal Reserve. As it goes down, something else on the liability side of the Federal Reserve needs to go up as well - reserves.

• The spending of TGA by the government injects money into the real economy which leads to an increase in bank reserves.

Financial Money Printing

• More financial money can be printed when there is a drawdown of TGA and other central bank technical operations that lead to an increase in bank reserves.

• Global financial money creation has risen over recent months due to various factors such as open market operations in China and Japan's need to defend their yield curve control.

• However, looking ahead, negative trends in financial money printing seem set to resume as banks use FED emergency facilities less and less.

Understanding the Quadrant Model

In this section, the speaker explains how the quadrant model works and how it can be used to predict market performance.

Quadrant Model

• The quadrant model predicts market performance based on the Global Credit Impulse.

• When the impulse is negative, growth decelerates, and earnings recession occurs. This puts us in quadrant one or on the left side of the quadrant.

• As central banks recognize their impact on causing a recession, they will switch back to monetizing and lowering interest rates. This will move us towards quadrant one where bonds and gold perform well.

• Once positive sentiment is restored, growth stocks and high-quality duration stocks lead the rally back into a new bull market.

• For now, a defensive position with weight on bonds in your portfolio and negative equity exposure is recommended.

Market Predictions for Next Few Quarters

In this section, the speaker provides predictions for market performance over the next few quarters.

Market Predictions

• Equity markets may start their second leg of bear market down after April Euphoria due to upcoming negative earnings growth recession and low financial money.

• Bond markets are predicted to hold up pretty well during this time.

• Later in the year, there may be an opportunity for a secular move back to quadrant one where it will be time to add bonds and high-quality equity names to portfolios.