Macro Dragon: Re-Up Part IV-A... Higher Probability Pathways...
Global Macro Strategist, Saxo Bank Group
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Macro Dragon: Re-Up Part IV-A... Higher Prob. Pathways...
Top of Mind…
- Time for this months check-in on a Macro Dragon staple, calibrating high probability pathways vs. low probability pathways – with the latter tending to have higher convexity, assuming that positioning is symmetrical to the lvl of probability. I.e. high probability having high positioning, obviously what is high probability for KVP may be low probability or unclear to someone else & vice versa.
- Whole point of this exercise is to take a step back & focus on the potentially much bigger trends of tailwinds & headwinds towards assets class prices, as well as overall contingency planning around portfolio positioning, trade set-ups & overall capital management.
- We’ve done a series of these previously & its worth noting that probabilities around scenarios can & should change, as the facts (or perceived facts) change.
- A great example of this was during Mar where there was a period of 2-3wks where KVP thought the chances of a complete market shutdown were greater than 50% - until the Fed stepped in & underwrote credit. That was the bottom. Flow like water, the Dragon does.
- 11 Feb 2020: Macro Dragon: Circles of Silence…
- 1 Apr 2020: Macro Dragon: Iterations... Part One... MAGA
- Liquidity = Monetary Policy Expansion/Contraction + Fiscal Policy Expansion/Contraction
- Current Regime? Continues to solidify into…
- Liquidity = Monetary Policy Expansion
/Contraction+ Fiscal Policy Expansion /Contraction
- Monetary Policy: Yes, since our last Re-Up in May, we have seen a few iterations of central banks governors talking a little more bullishly/less dovishly than they were in Mar-Apr-May… yet don’t mistake that for a pivot towards hawkishness.
- It is more than likely merely a pause, be it a “saving of bullets” or change/delay of accommodative mechanisms & future policies. We’ve already seen this flip-flop with RBA which after having moved to YCC with linking their 3yrs to 25bp, then went into there 2 Jun meeting with a much more constructive than expected posture, which was quickly backtracked later in their 7 Jul meeting, that coincided with Melbourne (A city of 5m in a country of 25m, so 20% of the entire population – interestingly enough, Melbourne contributed c. 40% of Australia’s GDP growth during 2018-2019) going back into their 2nd lockdown, given wave two of Covid-19.
- This is a theme we are likely to see play out globally & incidentally enough, the 2nd wave comments in the US are almost all entirely wrong – the US was at best shutdown across c. 50% of the country, in most places this is just an extension of wave one, wave two in these places will likely hit in the Northern Hemisphere Winter – so 1Q21. More importantly on monetary Policy, we’ve seen the Fed basically tell us that rates will not move up all through 2022 & we have seen Lagarde’s ECB continue to surprise to the “even more accommodative” side.
- Worth noting that there are always exceptions & this is also one that we have talked about – if KVP had to put some chips on the first G10 to move towards a more hawkish stance, it would be on the class of one Nation that is Norway… so once again… another structural reason to have a longer-term allocation to NOK & NOK assets. Yes, we have had the “easy” move on USDNOK & it ran +5% since we flagged it & took profits, yet even at these 9.30-9.50 lvls, we are likely well south of 8.00/8.50 by mid-2021.
- There are no “lines in the sand” from a policy makers perspective… and if they are, they will be similar to Obama’s famous line in the sand on Syria using chemical weapons… Obi did not blink on Osama, but he sure as hell blinked on Assad… YCC is on the way folks (one can argue we are already there synthetically), as are negative yields (we are already at real negative rates) & likely eventually equity purchases.
- Anything goes…if you are there, thinking that central bankers still have some shred of credibility to defend, then KVP would interject & claim you are on the wrong planet & different universe. Not trying to say they are not academically switched on & the majority of them mean well, its just at the end of the day - We are all just monkeys pushing buttons (or a form of a button), doing the best we can, yet unfortunately in a system where there is little to no accountability for central bank governors & treasury/finance ministers globally. This is not too dissimilar to the “career blow up” traders that trickle across hedge funds & banks – heads they win, tails you lose.
- Incentives & the systems around them are everything folks, KVP will keep repeating this until Dragon readers can recite it in their dreams & more importantly implement better systems in their respective companies, organizations, team, families & own initiatives.
- Tmr we will continue with other high probability pathways around Fiscal Policy, the regime & potential implications from an Asset Allocation basis.
To Keep In Mind Today
- AU: RBA Minds, RBA Lowe speaking @ 10:30 SGT/CST, Leading Index
- JP: National Core CPI
- NZ: Credit Card Spending, Milk Auction
- CH: CB Leading Index
- UK: Public Sector Borrowing
- CA: Retails Sales, House Prices
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