IN-DEPTH: TRANSCRIPTION - UnderTheLens - 01-24-24 - FEBRUARY – Macro 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.
SLIDE 3 - COVER
In this month’s UnderTheLens video we begin to close out our year-end, year beginning process. Our December LONGWave video kicked-off that process with a high level review of what the market charts were telling us about the future. That leads us to writing our 2024 Thesis paper which was the outcome of what the evolving 2023 Themes, in concert with prior year Thesis paper “road-maps”, were pointing us in the direction of. This year’s Thesis paper entitled “The Regulatory State” is now available. I encourage reviewing it along with the December LONGWave video as a basis for this month’s UnderTheLens and LONGWave videos.
In this session we are going to review what we see as the 2024 Macro Themes and in the upcoming LONGWave video with the overlapping 2024 Investment Themes.
We are an investment shop so these once a year “Big Picture” perspectives focus our investment “drill down” to be properly targeted.
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We have distilled our 2024 Macro Themes for this video into six broad themes as shown here.
Our 2023 Themes proved quite valuable in keeping us focused and returns quite satisfactory. We are optimistic for the same for 2024.
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Volatility is increasingly the name of the game in many of our 2024 Themes and across all assets classes.
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This was clearly evident in our December LONGWave video.
The impact of:
- The Post “Great Moderation”
- The quickly evolving Multi-Polar World
- And Generational Changes in how the world operates.
Changes that are changing the dynamics of:
- Globalization,
- Financialization and
- Mercantilism
… all of which we have discussed and written about previously.
A rewiring of the global commerce system creates geopolitical risks and business model shifts that will last decades.
With over 40 national elections expected next year and persistent uncertainties in trade policy and military conflicts, this is the reality of 2024.
The collision of stability & instability!
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Look at the market waves we witnessed in 2023 as shown here. Major market drivers suddenly appeared and abruptly took markets in a completely different direction.
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These waves are getting larger and more frequent.
At the root is confusion about what is happening and most importantly - why?
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As we concluded in the December LONGWave, expect the turmoil to get worse as historic social change is underway!
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One driver of increasing instability is the reality that US debt has become a systemic problem!
But raging increases in debt isn’t just occurring in the US. Global debt levels, as a constraining load and headwind on economic growth has now become a real problem.
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The US national debt is growing faster than the economy and has been for nearly a decade now. This is possible for short periods of time but not on a sustained basis because soon the interest on the debt becomes crippling. This is the position the US is now in. The impact was delayed due to “Zero Bound” global central bank rates but that has all changed.
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As the rate of growth of global economic activity slows, FX reserve growth also slows which limits US bond purchases by foreign central banks. Couple this with De-Dollarization and all countries needing to pay more to finance their debt and we have a squeeze. Money flows to higher rate and bond risk premia rises.
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Slowing credit growth additionally adds another headwind.
US inflation credit growth has been below the critical 2% level for 10 straight quarters!
This is serious red flag that can’t be ignored especially if a recession is soon to occur.
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Every indication is the slowing economic growth, stagnation and stagflation are highly likely ahead which we have documented extensively as recently as in last year’s Thesis paper entitled “The Great Stagflation”.
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The cost to borrow money in real terms is around the highest it’s been since the financial crisis, and the effects of this increase are still widely underappreciated.
First, the greater cost of taking on more debt will constrain governments that want to stimulate their economies. It will make debt dynamics much less favorable, raising the chance that countries may not be able to borrow their way out of a fresh shock without putting their debt on an unsustainable path. Given financial markets have become more concerned about this issue over the last two years, it means policymakers are likely to place a much greater weight on maintaining market confidence. In other words, there may be a bias against large stimulus during the next shock.
On both sides of the Atlantic, real yields have risen substantially over the last couple of years. For instance, the US government now pays around 2% in real terms to borrow at a ten-year horizon, up from -1% at the end of 2021. Nor is that confined to long-term borrowing, since real yields are now around or above 2% at all maturity lengths. Similarly in Germany, ten-year real borrowing costs are now in positive territory, having been less than -2% at the end of 2021. And because this increase is in yields that adjust for inflation, this will not mechanically reverse once inflation returns to target levels.
Second, one of the most important relationships for debt sustainability is the difference between a country’s real yield and its growth rate. For much of the period after 2008, growth exceeded real yields. That meant, in general, any country could roll over its debt sustainably, so long as it did not run a primary deficit that was too big. After all, national income was growing faster than national debt. But if that difference between growth and real yields narrows or even switches around, then it would require a smaller primary deficit or even a consistent surplus to prevent the national debt from moving to a trajectory where it spirals ever higher.
The beginning of debt sustainability being questioned may be closer than many investors think. None of the G7 countries are set to run a primary surplus in 2023, according to the IMF’s latest Fiscal Monitor forecasts. Even in 2028, primary deficits are still forecast in the US, UK, France and Japan. And this comes at a time when there are still several long-term pressures to spend money. For example, ageing populations require greater spending on health services and public pensions.
What is more concerning is how governments will deal with the next economic shock. Policymakers no longer have the advantage of historically low real interest rates, along with inflation that was broadly stable for many years. And following the pandemic, debt-to-GDP ratios also stand at their highest level in decades. That means next time, the economic backdrop is likely to prove much more constraining. That, itself, will be a surprise for those who have seen big bailouts in the past.
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The 2024's deficit is already on track to be the worst since COVID. Weakness in the US economy continues to hide behind surging debt levels and government spending.
A large part of the growth in GDP came from bloated government spending financed with more debt and inventory revaluation, adding 0.8 and 1.4 percentage points to GDP growth. The increase in gross domestic product between the third quarter of 2022 and the same period of 2023 was a mere $414.3 billion, according to the Bureau of Economic Analysis, while the increase in public debt was $1.3 trillion ($32.3 to $33.6 trillion, according to the Treasury). The United States is now in the worst year of growth, excluding public debt accumulation since the thirties.
This trend is continuing at least into the first quarter of the new fiscal year, as it is apparent that total public debt isn't slowing down.
According to the latest monthly statement from the Treasury Department, the total budget deficit for the 2024 fiscal year (which began October 1) has already risen above $380 billion. The new total, which includes the months of October and November, puts the US on track for a total annual deficit of more than $2 trillion by the end of the fiscal year. That would be an increase of more than 25 percent over 2023 fiscal year, which was itself a 23 percent increase over 2022.
A 2024 annual deficit of $2 trillion would make 2024's deficit the third-largest deficit ever, behind only 2020 and 2021 during which federal spending in Covid-related social benefits were seemingly unlimited.
Things are not getting better and the US government has no apparent appetite to cut spending especially in an election year!
The US Debt is now unquestionably a Systemic Problem!
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These problems are not going to be solved by global central bank rate cuts.
The US Federal Reserve is likely to cut the Fed Funds Rate in 2024, end QT, restart QE. YCC and some form of Capital controls can be expected within three years.
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152 global central banks are expected to cut rates in 2024.
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The big focus of 2024 will be the slew of elections around the world. We should expect volatility around these, particularly if markets become nervous about fiscal spending promises. But when we take a step back, the most important aspect of the elections may be observing any increase in populist views from both sides and examining how they may realign trade relations between countries.
- Insular trade,
- Intrusive governments,
- Higher fiscal spending and
- Extreme political views.
Many would argue that globally, this is how 2024 is shaping up. But it is also something of an analogy with the world four decades ago before the period of rapid economic globalization and the improvement of relations between the US and China.
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A few events next year may deepen the similarities between the ‘now’ and ‘then’. Among them is that populist parties are serious contenders in next year’s spate of elections that will see countries with half the global population go to the polls. And because growing populist views often focus on domestic issues, a possible win for them next year may mean more countries may look inward or implement policies that are more aggressive towards trading partners.
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We are still of the belief we will see a recession in 2024. The real question is how severe it will be?
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We have published a significant amount of work that historically confirmed recessionary conditions.
On a year-over-year basis, the LEI is now down 6.9%. It is down on a Y-o-Y basis for the 18 straight months. This is approaching the biggest Y-o-Y drop since 2008 (when we had the Lehman Bros collapse) other than the COVID lockdown-enforced collapse.
It is hard to see we will not experience a recession.
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However, this is an election year and strange things can happen in election years.
Especially in an environment of increasing instability - like we are currently experiencing!
With the Federal Reserve aggressively shrinking its balance sheet we are seeing liquidity sharply diverging as well as seeing the Fed’s own Financial Conditions Index signal unusually loose financial conditions.
How can this be?
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The answer is shown here where we lay out the two stages of Stealth Liquidity that the Fed in concert with the US Treasury has orchestrated.
This has delayed the recession, pushed market valuations higher and bought the government time during an election year.
Stage II shown here is only now fully getting underway and will likely accelerate as the BTFP ends and the Fed uses the Discount Window in its place.
The system is set up to quite literally create an unlimited amount of debt financing and market liquidity that they feel necessary to achieve political and economic goals needed to get re-elected!
I will leave the explanation of this chart to the details we have outlined in our newsletters on the subject which can be found on the MATASII web site.
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Since publishing our 2020 Thesis paper entitled “Global Conflict” the situation has only worsened as predicted.
The build-up of populist views across the world could now result in new clusters of nations besides the BRIC-10 with similar interests.
As a result, trade could be hampered and some ties could be jeopardized while other ties draw closer. Growing military and economic clusters are continuing to build significant power. Consider that the new BRICS-10 has overtaken the G7 in their contribution to global GDP (on a PPP basis). Additionally, the Regional Comprehensive Economic Partnership Agreement (RCEP), which now counts 14 Indo-Pacific countries including Indonesia and Korea, is the world’s largest free trade deal GDP.
Populist policies often result in the merging of public and private power. We think the merge will intensify as governments use industrial policy to ensure they are stirring they wheel of a growth recovery that results in greater self-sufficiency. In the US, a common denominator across political lines is a stronger stance on China.
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The pendulum is also swinging more sharply towards conflict, instability and state failures.
In 2023, the list of "ungoverned" countries was limited to Syria, Libya, Somalia, South Sudan and, according to some, Afghanistan.
In 2024 Sudan, caught in a war between rival military factions, is certain to join the category, while Myanmar, with areas controlled by Karen rebels expanding, is heading in the same direction.
If you hope that the pendulum will swing towards peace, think again.
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In Ukraine, both sides, that is to say Russia and NATO appears to likely sustain conflict for the foreseeable future.
The Gaza war is set to continue in 2024. Even after Israel achieves its military objectives, that is to say dismantling Hamas' military machine and freeing Israeli hostages, within weeks the gargantuan task of building a new status quo is certain to take much longer.
In the meantime, the Gaza war has already ricocheted to North Yemen, still under Houthi control, and parts of Lebanon, under Hezbollah's total control. Fighting involving Iranian-controlled militias in Syria and Iraq with US-backed elements is also likely to get wider dimensions.
There are indications that both Russia and Turkey are also preparing for military action on a grander scale to secure the chunks of Syria under their control.
For its part, the Islamic Republic of Iran is likely to face a sharp swing of the pendulum towards uncertainty in both domestic and foreign policy areas.
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Almost everywhere, we are already witnessing a return to the narrowest concept of national interests. Fear of dependence on potentially hostile or unstable powers has forced many countries, especially in the EU, to lean towards economic nationalism and discard the "comparative advantage" argument.
France, for example, has just unveiled a plan for self-sufficiency in a number of areas, notably pharmaceuticals, microchips and batteries for electrical vehicles. In a more folkloric move away from globalization, France has just revived growing a number of plants used in textile industry.
Finally, the pendulum looks likely to swing in favor of small- and/or medium-sized nations capable of adopting non-ideological and effective policies in the interest of their people. After all, no nation is small or medium as such;
“It's the leadership that makes a country small or great!”
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We can expect to see scarcities and blackouts begin to shown in 2024 in the areas of energy, food and consumer electronic components and products.
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The World Economic Forum and United Nations have been highlighting these risks for over two years now.
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We have shown in prior work that when inflation is sustained over 5% for any sustained period of time we can expect three waves of inflation. This is can be expected without policies in energy and food that are seriously manifesting serious problems into almost pre-determined crisis.
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The shock of Covid, the end of the Great Moderation and the Beta Drought Decade …
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.. are leaving the situation as an almost “fait-de-compli”
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The problems are global in scale and will leave everyone impacted and scrambling for affordable energy and food source.
Worrying about whether electricity needs must be filled solely by sustainable solutions or methane from cows resulting in policies banning cattle ranching & cow herds will all seem highly questionable
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The slowdown in China will soon be seen as a major structural problem that can’t be easily fixed with serious global spill over.
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China has saved the global economy on four separate occasions over the last decade and a half.
China will no longer fill this role and in fact will be a contributor to financial and economic issues.
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The Chinese Communist Party maintains its power on the expectations it will create jobs and deliver reliable real estate investment returns. Both are now in serious jeopardy.
Youth unemployment continues to worsen leaving a whole generation increasing disgruntled with the CCP …
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As much as the US economy is almost completely dependent on consumer consumption (with ~70% of US GDP is Consumption), China with much lower consumption is highly dependent on Capital Formation (~43% of GDP).
This has become a very serious problem for China as Foreign Direct Investment (FDI) support has quite literally "fallen off a cliff"!
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Real Estate, stock prices and investments just keep falling in China.
Rich Chinese are using avenues such as Crypto currencies and foreign land purchases to get their money out of the country.
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We can expect the problems to get worse in China in 2024 as increasingly more desperate solutions are implemented.
The world will not be spared.
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There are other Themes but we just have time to isolate these six themes in this session.
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They are all underway as we talk.
The consequences of these themes have yet to be fully felt – be prepared.
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They all stem from and overlap from generational social changes, adjusting to the realities of a Multi-Polar world and the end of the 40 years of the Great Moderation.
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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!
