Macro Update: The Hand We’re Dealt

This week saw a notable improvement in our proprietary macro index; up 4 points to a net overall score of -8.16.

The positive needle-movers were:
Housing Permits (from neutral to positive)
Truck Tonnage (from negative to neutral)

And Industrial Materials prices (from neutral to positive).

Bucking this week’s positive trend was:
Citi’s Economic Surprise Index (9th straight weekly decline, going from positive to neutral)

And the Consumer Staples/Consumer Discretionary stock performance ratio (from positive to neutral)
Housing Permits: Obvious
Truck Tonnage: Obvious
Industrial Materials Prices: Rise when demand relative to supply rises.
Econ Surprise Index: Records actual results against economists’ expectations.
Staples/Discretionary Ratio: Rises when consumer staples (stuff you buy to stay alive) stocks outperform consumer discretionary (stuff you buy when you have extra money) stocks.
Signals (strong)
Housing Permits: Obvious
Truck Tonnage: Folks and businesses buying lots of delivered goods/materials.
Industrial Materials Prices: Could mean increased manufacturing and construction activity. 
Signals (weak/concerning)
Industrial Materials Prices: Could mean lack of capacity due to production bottlenecks, protectionism, etc.
Econ Surprise Index: Economy beating expectations trend declining.
Staples/Discretionary Ratio: Investors anticipating relative economic weakness.
With regard to rising materials prices, recall that our general thesis calls for potentially rising inflation going forward. Now, per the above, that can be a double-edged sword, so to speak: It’s a positive sign if it reflects rising demand in a growing economy: I.e., higher prices inspire increased production, job growth, capital investment, etc. When, on the other hand, it comes amid price spikes due to disruptions to production and distribution (like the oil shock, etc/stagflation of the 1970s), political policies (that boost, say, the housing market, for example), and so on, amid otherwise fragile economic conditions, well, then it’s a bad thing.
Surveys offer clues.
Here’s from the just-released monthly Eurozone Purchasing Managers Index:

“Signs of underlying price pressures building were evident via the largest rise in input costs since February. Increases were reported in both manufacturing and services.”

And here’s from the U.S. Flash (preliminary) Purchasing Managers Index released this morning:

“Goods producers noted the increased use of discounting to attract clients during October, with selling prices rising only moderately. In contrast, cost burdens rose the steepest rate since January 2019 amid supplier shortages.”

So, “cost burdens” rising at a steep rate for producers, while having to cut prices to attract clients. Well, not the setup we’re looking for!

In closing, and to cut to the chase, while indeed the present setup is anything but ideal, it’s the hand we’re dealt. The secret to long-term investment success (read risk management) is to accurately read that hand. Call it clarity. 

Like we said in this week’s main message:

As for markets, ironically, a weak dollar, low interest rate, high government spending environment, by itself is bullish for equity markets. And I firmly believe we’ll discover opportunities therein to exploit going forward. However, without a true market-clearing bear market bringing valuations down to fundamental reality, prudence will demand that we employ smart hedging strategies well into the foreseeable future.
That’s a setup that’s also bullish for commodities; many of which that are not coming off of longest-ever bull markets (like U.S. stocks). Quite the opposite in fact.
Here’s the 10-year chart of our ag commodities ETF:

Base metals:
Gold (although more a currency than a commodity):
Versus U.S. stocks…
New York Stock Exchange Composite Index:
S&P 500 Index:
Nasdaq 100 Index:
Versus Foreign Stocks:
Europe, Australasia and Far East Index ETF:
Emerging Markets:
A weakening dollar environment (an absolute must for the powers-that-be going forward) favors foreign equities, emerging markets in particular.
White line = the US Dollar Index/Orange = our emerging markets index ETF:

Have a nice weekend!


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