Weekly Macro Note: 6.2.2024
The USD is at an interesting juncture. Equity markets seem poised to continue to hit all-time highs. The market I am referring to is the equity bucket that gets brought on the premise of growth; think stocks on the NASDAQ and the like. On the flip side, you have the most astute buyer of stocks, Berkshire Hathaway, building up the biggest cash balance in its history. While they are still actively buying stocks, they are not buying as much as you would think.
With a $189 billion army of federal reserve notes ready for war (to buy stocks after a crash), one must wonder: when is this crash coming? This is where the big picture for the USD comes into play.
Since 2009, the market has been structurally bullish. That is, operators in the market will always buy dips, as shown at 2012-2015, 2018, 2021 and the start of 2024. In the same vein, we have seen the biggest bull run during the same period.
How can we reconcile these results from an economic and capital flows standpoint? This will ultimately provide some clarity moving forward. To start, it is critical to realize that currencies move based on the market’s perception of the relevant political narrative and whether it is supportive or negative on price.
For example, the relevant political narrative for the USD from 2000-2008, was that a cheaper USD was good for exports. Therefore, economic growth looked good if the USD was going down and stocks going up. However, it cost the “regulators” the eventual destruction of the national housing market in the US. The monetary contagion was felt abroad as well.
Having a basic comprehension of what underlies currency moves, we can analyze this current situation further. What determines what operators will do or are doing nowadays given the prevailing political narrative? Presently, there are a few items impacting decision making regarding the USD.
First, we have the disastrous impact of the zero lower bound interest rate policy of 2008-2020 era wreaking havoc on the economy at all levels. The cost of capital has gone from 0.05% to 5.3%. This is like your annual rent going from $100 to $10,600.
Second, the amount of fiat put into circulation from 2020 to present day accounts for 30% additional fiat. This is on top of an additional 98% of fiat that was put into circulation from 2009 to 2020. In total, from 2009 to the present, we are at an additional 159% fiat currency in circulation. Both are shown in the below images.
The below image highlights the additional fiat put into circulation since August 1, 1918, because that is the earliest data print available to measure from. We are at an additional 53,500% fiat currency in circulation from that point in time. This is the reason why what cost 5 cents then costs $500 now; math.
Finally, mortgage rates exploded on the back of the white-collar economy being shut down. On the back of that, rental prices have also gone up at ridiculous rates. As shown in the image below, the increase in rates have imposed an increase in the cost of obtaining a mortgage to the tune of 165%.
To sum up all these points, people are strapped for income and that typically comes in the form of cash, not assets. If the economy is in a bad way and let us assume for most people, the worst-case scenario is to have low income but no savings. I like to use this scenario as a benchmark to do my analysis as it is realistic of most people. Per the image below, disposable incomes are up 7% from the start of 2020 to now.
From the artificial closing of the economy in March 2020 to now, disposable incomes are down 6%, however.
Interest rates at the end of the curve are higher than they have been in a long time, and the economy is on its edge while equity markets are raging at all time highs.
From a fundamental perspective, I am wary of stocks, and a fan of interest rate products and cash at these levels given our base fundamental analysis. Once we take sentiment into account, it only paints a better picture in this regard. This is what can give us a final run of fun in equity markets before rolling over. Sentiment is extremely bullish, and market tourists are aplenty. Additionally, the yield curve inversion signal no longer works apparently.
We know what happens when people think it’s different this time. It never is.
