Macros Tracking How to and Lessons

By pjain      Published June 26, 2020, 6:04 p.m. in blog Invest   

STANDARD Multi-decade Business Cycles, Macro Lessons, Theories

4-5 year Business cycles

Presidential Cycles

  • Now after 2-term presidential elections when all bets are over - all problems come to bear
    • 2000 (end of 2nd Clinton term)
    • 2008 (2nd Bush term end)
    • 2016 nearly crashed needing QE3 to get out on top of '15end Chinese capital flight

POL: Democratic win in 2019 could undo Trump Tax Cuts, add Wealth Tax => 30%+ drop in stocks

If the Democratic Party also gets control of the Senate and possibly the POTUS/White House in 2021, the current corporate tax rate would likely be elevated back to levels seen prior to the Trump administration’s sweeping tax cuts in 2017. The proposals of the major Democratic candidates are to increase corporate tax rates and to take that incremental tax revenue and redirect it towards other social purposes.

  • Under Trump U.S. companies effective tax went from 27% to 19%. The incremental income went to EPS, a strong reason for stocks jump in 2017 and 2019 on top of buybacks. If this is reversed, a 30%+ drop is possible.

LT Debt Cycle ~20+ Year

Cyclicals vs Defensives vs LTGrowthTrenders

Yield Curve

Market Key Factors, Changing Ownership, Smart Money vs Dumb

US Equity $7T vs GDP

Huge Buybacks - Corporates big buyers of equity

Significant low-interest motivated buybacks ie share repurchases is a key factor on rising prices.

Shrinking Equity Markets on LBOs, M&A

The shrinking of the U.S. equity supply, including buyouts to private equity firms, acquisitions is acknowledged as a significant factor contributing to the rise in equity prices.

This should continue in 2020, but at an anticipated rate in the $500 billion range, or around half of the 2019 total.

Who Owns Equities - and Big Stock Buyers of 2020 - HFs

High Freq Trades esp. MELTUP - GS, JPM and lots of Midsize funds

The Fed in Not-QE has been pumping in REPOs of $300b+ in short term liquidity into the system. Clearly a lot seems to go into trading systems.

Quant funds, multi-strategy funds, and high frequency traders, with $1.5-$2 T in liquid assets. It’s impossible to know how much these groups are influencing each new all-time record - but they represent HOT MONEY that flows in and follows the news factors.

An estimate is that hedge funds ALONE could put $150 billion of incremental buying power. If that magnitude of move is already underway, it could be propelling the price of some top performing tech/communications stocks including Apple, Facebook, Netflix, Google, Microsoft and Salesforce.com.

ETFs - passive funds dominate

MFs - hurting as passive

Mutual funds net sellers of U.S. equity,

INST: Pension Funds $4T assets - reducing Equity exposures

The largest group of U.S. institutional investors are the state and municipal pension plans with nationwide system comprising over $4 trillion in assets. Just the California and New York state funds contain close to $600 billion combined

  • Pension directors are reducing their domestic equity exposure for last few years, perhaps on valuation concerns.

    CALPERS 24% us equity, MASS in mid 10s weighting - this is far less than 50%+

Retail: own 20% - PEAK Holding Continue to add 401ks $5-10k/$100k

They own 20% or $7 trillion of the total U.S. market ownership, added to their stock portfolios in 2019.

A Goldman Sachs study: households now have a comparable equity allocation to 2007, only surpassed by the dotcom bubble of 2000, implying that retail buying is an unlikely driver of the current move.

INST: Hedge funds - playing catchup

  • $1.45T investible funds - but only 50% is in equities - most do alternative assets

  • 2020 - playing catchup - An estimate is that hedge funds could put $150 billion of incremental buying power. If that magnitude of move is already underway, it could be propelling the price of some top performing tech/communications stocks including Apple, Facebook, Netflix, Google, Microsoft and Salesforce.com.

  • 2019 returned 15% missed out 32% gain - hard to justify 2/20 fees as very low index funds

INST: Sovereign Funds - seeking PE risk - not expanding Equity

They are well-heeled, but currency is a major factor - international policies like security ZIRP/NIRP have many of them buying bonds esp. US Treasuries.

They have been increasing their private equity allocations, but generally at the expense of equities.

Endowments - low equity allocations

  • Historically Yale, Harvard, etc. have been VERY LOW equity allocations with us, global equity under 10%. This is because they get modeled returns better with huge mix of alternative investments like real estate, PE, VC, etc. on top of bonds, etc.

Recurring Disasters - Staged/Exploited to allow Wealth Accumalation

Black Swans vs White Swans

  • “Black swan” events were made famous by Nassim Nicholas Taleb in his book by same name, as events that are VERY rare like fat-tail statistical distributions and very unpredictable, and can yet like tornados hurt entire financial systems that are unprepared. So we are left fearful of the UnKnown Unknowns.

  • White Swan Events - Nouriel Roubini however claimed in his book "Crisis Economics", that financial events are really more like hurricanes

    • (a) Predictable result of built-up economic and financial vulnerabilities and policy mistakes.
    • (b) Frequent - aren't nearly all swans white?
    • (c) More about Known Unknowns

Minsky Moment - boom turn into a bust.

Financialization of the World - Central Bankers Blow Bubbles

Financials - NIM hurting all.

Demographics

Rich able to use low cost loans to accumalate Assets

Rapid Rise of Inequality

MACROS BY SECT

How to Study Sector Key Factors, Rollover and divergence

Energy, Oil at $70 - flat no spike

Defense

Airlines

Boeing backlash subsides, lifting airline stocks 2020 will be the year that Boeing’s embattled 737 max aircraft returns to the skies, according to Wien, which means upside ahead for airline stocks. He said that the company will fix the issues surrounding the aircraft, and that deliveries will begin again. This, in turn, will allow airlines to “operate more efficiently and increase profits.” “The stocks become market leaders,” he said of airline names. - Byron Wein Jan'2020

Financials - NIM hurting all.

Technology

Technology led all sectors in 2019 returning 48% best year in a decade with Apple, Microsoft doubling. The top five U.S. companies — Apple, Microsoft, Alphabet, Amazon and Facebook — now claim 18% of the S&P 500 market capitalization, the highest percentage ever, But now while Jan FAAMNG are going great, overall, reversion to mean (esp. on cyclical slowdown - ads get cut) the craze will go down, and they could invert.

Globalization, Trade Wars

Geopolitics

The United States is locked in an escalating strategic rivalry with at least four implicitly aligned revisionist powers: China, Russia, Iran and North Korea. These countries all have an interest in challenging the U.S.-led global order. They all want to undercut American hard and soft power abroad by destabilizing the U.S. from within through asymmetric warfare eg fentanyl/opiate/drugs, partisan rancor, chaos, disputed vote tallies and accusations of “rigged” elections.

US has already been increasing the pressure on these countries with sanctions and other forms of trade and financial warfare.

Also, traditional "allies" are not reliable or have stabbed US in the back - Israel - huge influence in Press, Media/Movies and Finance in US - but tends to twist US policy, unreliable - UK - has its own internal information and issues - spends a lot to influence US - Pakistan - used to be a significant strategic ally, screwed Kissinger "Tilt" under Nixon, harbored Osama for years - Japan, S. Korea, Taiwan vs China - are they reliable allies - Nato - not boosting defense of US - or contributing to the defense of Europe either financially or manpower - Turkey - is stabbing US in the back - with its own aspirations to invade Syria, take over East Med Gas, Libya,etc.

In return, Trump is trying to contain or trigger regime change in countries like Iran, Venezuela, Syria etc through economic sanctions and other means.


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