IN-DEPTH: TRANSCRIPTION - LONGWave - 02-07-24 - FEBRUARY – Investment Themes for 2024
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
CHART 3 - COVER
In this first session of the year for the LONGWave video we will talk about the major INVESTMENT Themes for 2024.
AGENDA
We show here the Macro Themes for 2024 at the bottom and last year’s 2023 at the top.
In our recently released UnderTheLens video we discussed the 2024 Macro Themes
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Here I am showing the 2024 Macro Themes and how they align with this year’s Investment Themes, shown to the right of the vertical red line.
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We won’t discuss the individual sectors and instruments in detail in this session, but instead will try to:
- Position them,
- Highlight what is important, and
- Draw some conclusions for timing in 2024.
It is the purpose of our weekly newsletters to focus on individual sectors and instruments as 2024 unfolds, as well as within the others areas of the MATASII web site.
The other areas are the Triggers and Strategic Investment Insights sections.
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Besides the UnderTheLens video I mentioned, in arriving at these Investment Themes we refer you to the November and December LONGWave videos which were foundational at arriving at these Investment Themes, along with the February UnderTheLens Macro Themes video.
In this session I would like to position these Investment Themes in the context of the subjects listed here.
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I want to start with the Big Picture!
Seldom has the Big Picture been more important. Normally the Big Picture is like watching “paint dry” or an “iceberg melt”, interesting but of little value in the short term which financial market operate within.
This is not the case currently The US and world is in the midst of incredible change which I outlined in this year’s Thesis paper: “The Regulatory State” where I compared it to 1849 and the beginnings of the shift of the Imperial State to the Democratic Sovereign State
Vladimir Lenin said it aptly - “There are decades where nothing happens; and there are weeks where decades happen”
We are in such times now.
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We are experiencing change that I have talked about throughout 2023:
- A MAJOR CHANGE THAT IS GENERTIONAL IN NATURE,
- AN ADJUSTMENT TO THE WORLD BECOMING “MULTI-POLAR WORLD” LESS DOMIANTED BY US POLICY AND DICTATE, and
- THE ADJUISTMENT TO THE “POST -GREAT MODERATION ERA”.
The importance of the end of the Great Moderation is a shift in the three areas shown here.
- With what is called Re-shoring and De-Risking nations are rethinking Globalization and Supply chains. Globalization delivered labor arbitrage’s cheap labor and cheap commodities. That deflationary force is being replaced by potentially inflationary pressures. This is a secular change, not a cyclical change.
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- Secondly, Financialization is changing from what delivered steadily falling interest and funding rates since the 1980’s to rising rates and the cost of funding. The reason is rising risk premiums and duration bond premia – both associated with increasing risk. The global conflict and financial complexity is increasing risk in many ways including moral hazard and unintentional consequences.
- Thirdly, the world of Mercantilism is changing. By this we mean that the practice of emerging export nations by using their FX reserves and excess profits to buy US Bonds -which drove down interest rates and strengthened the US Dollar allowing the US to become an unprecedented indebted 70% consumption economy. Additionally, this fostered export nations using currency devaluations as competitive advantage against the G7 developed nations.
These changes are profound and are creating major adjustments and trends that impact Investment Themes.
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Last year, in this session we showed this “big picture” market expectation. Shown in red in the top right corner you can see we were looking for a possible double top in 2023.
Which we got.
With this complete we expected a major consolidation to begin which we envisioned as a “Lost Decade” or what we referred to as the “Beta Drought Decade” which would be marked by Stagnation, Stagflation and Global Debt financing problems.
We still feel that is in the cards.
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This chart highlights the “Domed Top” we believe we are currently in the process of putting in. This sort of top takes a long time to put in and is past described as “Generational” in nature.
The Investment take away here is that it will not be a good decade for TOTAL REAL equity returns.
- TOTAL: Meaning Dividends & Capital Gains will be poor
- REAL: Meaning in after inflation and currency devaluation.
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The shape of this market chart also aligns with other changes.
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It mirrors this chart of Household Net Worth as a percentage of Disposable Income
We can expect the US to experience a decade of reduced Standards of Living in the US and developed nations.
Reduced Standards of Living suggests tightening consumption levels and a reversing wealth effect. Both have been pillars of establishing the US as a nearly 70% consumption economy.
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Elevated Inflation driven by scarcity, poor public policy and currency devaluations will highly likely be with us for the duration of the decade.
Developments here will have profound impact on your choice of Investment Themes.
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We laid out this roadmap in our 2023 Thesis paper “The Great Stagflation”, which continues to unfold as predicted.
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We are now at a critical inflation point as shown in this chart which we also featured last year.
The DJI:Gold ratio has clearly identified previous periods of protracted Cyclical Stagnation and Stagflation. Last year we had just completed D leg of a predicted final ABCDE consolidation before breaking out.
The “E” wave (a circled E) has ended at precisely at our predicted “Cusp” identified by two diverging red arrows.
We believe we are headed down; however the wild card here is yet to be dealt! We will talk about that more in a moment when we talk about the Regulatory State, Regulatory Repression and Monetary & Fiscal Policy.
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The continuing shrinkage of market breadth is a serious risk. The degree to which the Magnificent Seven now dominate the equity markets is a harbinger of what has historically happened when this occurs. The Nifty 50 of the 1960-70’s and the Dotcom Bubble of the late 1990’s should not be ignored.
These periods do not end well and lead to protracted periods of financial underperformance of equities.
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A Dotcom like crash may not be imminent, but the current pre-occupation of the potential of AI may like the Dotcom Bubble and the advent of the Internet may evolve differently than everyone believes. There is little double it will happen and will be big. However, don’t confuse the adoption with how the markets will adjust the pricing of this new evolving technology.
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Our Financial markets are increasingly coming under control of financial regulators, government edicts and vast global derivative trading.
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The equity markets are the tail on the dog to what is going on in the Derivatives markets.
The derivative complex is involved in all aspects of the financial markets with an array of complex products that have become impossible to regulate globally in any meaningful fashion.
Simply said, it is an accident waiting to happen that will stem from increasing volatility from rising global risks which will have unknowable and unintended consequences. The 2023 UK Derivative crisis as a result of Liability Driven Investment (LDI) funds were at the center of the severe stress that emerged in the UK gilt market in the aftermath of the September 2022 UK "mini-budget". This is but one example.
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The Covid-19 Financial shock of massive deficit spending and growth on government debt has yet to be fully felt.
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US Debt to GDP is well above Reinhart & Rogoff’s 90% “No Return” Threshold and once broken is going almost parabolic in growth.
US Fiscal Deficit is 7.5% of GDP under Biden and 6.6% under Trump, and are biggest since Great Depression/WW2! It doesn’t matter who is running the administration the game is uncontrolled spending because it is the only way now to keep the system from imploding.
This happens when it takes:
- $1.55 in BUDGET DEFICIT to generate $1 of growth or
- $2.50 in NEW DEBT to generate $1 of GDP growth
We are trapped!
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But it isn’t just a US problem!
Global debt is hitting new record highs every day: it hit $224 trillion in Q4'23, up from $150tn in 2013, which in turn doubled from the $75tn in 2003
In the past 10 years:
- Government debt has grown 60% to $83T,
- Corporate debt 50% to $86T,
- Household debt +40% to $55T
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Debt above Reinhart & Rogoff’s 90% of GDP slowly begins to cause problems on multiple fronts. Not only does in begin crowding out new investment in productive assets but it increases Credit Default Swap costs - Costs that increase very rapidly in a geometrical fashion.
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… which directly carries over into debt costs as shown here where Credit Default Swap rates track the increasing yield required to sell government longer duration bonds.
Corporate Spreads then begin widening… and on and on.
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The normal warnings signs in the US are being somewhat dampened currently by government economic reporting using statistical distortions and stealth liquidity pumping .
I have written extensively about both in our weekly newsletter as Stage One quietly drained Reverse Repos from nearly $2.7T down to the approximate $400B level to finance government debt financing.
Stage II using nearly $60B in BTLP rate arbitrage is allowing highly leveraged Hedge Funds to increase funding from just short –term T-Bills to longer term duration government debt.
These are short term “games” that can’t be sustained and will require further significant increases in the Federal Reserve’s Balance Sheet and various Regulatory Repression methods such as Off Balance Sheet Contingent Liability Guarantees, YCC, QQE and new ideas never before been used.
None of these are solutions but attempts to defer what appears to be inevitable without whole sale changes to the Global Financial System.
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During 2024 Monetary and Fiscal Policy will be acutely watched and reacted on by financial markets.
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The Federal Reserve’s long awaited Pivot to reducing the Fed Funds Rate will occur in 2024. Later than the expected March time frame and likely driven by a financial crisis in Regional Banks, Commercial Real Estate or a Geo-Political event shock. Whatever the event it should be expected and your portfolio had better be able to handle it.
The Federal Reserve historically always follows. It seldom if ever leads.
In a stable environment it follows the 2Y Treasury Note which the Money Center Banks tightly control – remembering it is the Money Center banks that sit on the boards of all the Regional Federal Reserve Banks.
It is presently sending a message (the 2Y note shown here in orange) that it is time for the Fed to lower rates. The Fed can be expected to likely take action before June barring a crisis event.
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When we consider the 2Y Yield minus the Fed Funds Rate we can see we are clearly in the historical danger area!
The Fed it attempting to buy as much time as possible to let inflation fall further while at the same time allowing the Fed and Treasury to force Real Rates higher though Treasury TIP issuances.
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The problem here is that though the Real Fed Funds Rate is already at levels that have crashed markets previously …
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The 10Y Real Rate is not yet near the 2.5% area that has crashed markets in the past.
This is where TIP issuances through the US Treasury auction are hoped to help in Q1 and Q2. All intended to give the Fed and Treasury more room to fight the inevitable – they hope after the coming US election (or leave the mess for the new administration)
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This MATASII proprietary chart which we publish regularly in our weekly newsletter shows the correlation of the Yield Curve Steepening and when markets actually start to react. We see this clearly when we compare the current situation to the Dotcom Bubble and the 2008 Financial Crisis.
Indications are that is still out towards Q3 but of course this can and is likely to change.
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There is little doubt 2024 is going to be an interesting year, especially when we see the degree to which global central banks have begun accumulating Gold Reserves. This is no coincidence and tells you what those who are expected to know what lies ahead are thinking!
It may be 2025 but it is brewing and your portfolio must be weather proofed accordingly.
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So what can we conclude?
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Our weekly newsletter and chart packages will focus on the investment products that match the current situational analysis we just discussed and our macro themes.
We don’t give investment advice at MATASII.com, but with the aid of a professional financial advisor we think you will be better prepared for what unfolds.
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The US equity risk premium using 3-month T-bill is at a 23-year low. This is quite worrying – especially in light of everything we have just described.
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When I look at the Magnificent Seven and how META & NVIDIA just performed I feel investor exuberance may be over extended.
How Wall Street can reward sectors that are cutting jobs without damaging consumer spending is a puzzle? We wonder if stocks are disconnected from main street?
… like Meta who has reduced headcount by20,000 and bought $20 BILLION of stock in ’23 - to the tune of $1 MILLION in buybacks for every fired employee.
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… like Nvidia…. Though I believe in the future of AI and the future of leaders such as Nvidia I can’t hlp but wonder how a 70% consumption economy sustains itself when the inevitable layoffs will surely begin to arrive?
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I will leave you with one final thought.
The Exter pyramid serves as a guide to comprehend the risks facing America, particularly in anticipation of what may be the most severe credit crisis in the coming decade or two, centered on the USD crisis.
Organized from the most illiquid and highest counterparty risk assets to the least risky and most liquid, the layers of the inverted pyramid provide a unique perspective that builds from the mindset of a counterparty-risk sensitive investor. A swift glance at the pyramid reveals that the removal of any assets on the lower ends (the more narrow base), will lead to the downfall of everything associated with it on the higher end, akin to a collapsing Jenga tower.
This is why any problems in US debt and with it, specifically US Treasury Bonds as thr global risk-free measure along with the US Dollar as the global reserve currency are potentially so devastating.
This model also unveils the flow of capital during economic phases.
In times of credit expansion, capital ascends the inverse pyramid into higher-risk, lower-liquidity assets. This occurs when investors see systemic economic safety and are comfortable taking on greater risks for higher returns. Note, that the broadening of the pyramid signifies the reusing of the same capital as collateral multiple times (e.g., fractional reserve banking, margin trading), contributing to an exponential amount of theoretical contracted capital found on the higher layers. This may sound astonishing, but the widely held belief is that the value of assets trading in the white layer derivative layer reaches into the quadrillions!
In a crisis, deflation is observed as credit flows down the pyramid toward higher-liquidity, lower-risk assets like bonds, cash, and gold. This occurs as capital is recalled and flows back to more stable ground, illustrating the waterfall of credit returning to the bedrock of the financial system—risk-off assets with minimal counterparty risk. Depending on the severity of the financial crisis, one may actually see a greater allocation in yellow-layer assets rather than the base layer of gold. Interestingly, this in part explains why Treasuries tend to do better than gold initially on the onset of a crisis.
The insight here is that there are layers of risk often unseen or incomprehensible to many. John Exter’s inverted pyramid provides a contextual view of capital and credit flows during macroeconomic expansions and contractions. When considering potential investments or business opportunities, there’s more at stake than just examining a balance sheet. Unfortunately, our financial system is inherently flawed, relying on credit notes we designate as ‘money.’ The foundation is compromised, yet the entire global financial structure is built upon it, creating frustration on various fronts. Business operators can’t solely focus on being savvy entrepreneurs and ignore the interventions of central planners.
Similarly, savers cannot accumulate capital with the expectation of passing it down without being significantly impacted by decisions made by figures like Jerome Powell. The silver lining, however, lies in an alternative – John Exter’s foundational base layer, gold. This means that individuals are not bound by the uncertainties of government-centric central planning. Any personal capital stored in gold enjoys liberation from credit risk, bank failures, currency devaluation, and much more.
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2023 turn out to be an outstanding investment year for you and your family.
I sincerely thank you for listening!
