S2 E3: A Global-Macro Economic Trilogy

In Episode #3 of Season Two Greg offers an in depth look at three countries which reflect the three primary and dominant macro-economic "backdrops" - Stagflation, Inflation and Deflation.

Each of these locations offer crystal clear evidence within the data and the market positioning and thus gives us clues as to how these scenarios may emerge in other countries, including the Anglo-nations (AKA USA, United Kingdom, Canada, and Australia).

Subsequently we can use these three examples to provide a roadmap to aid in deploying risk capital, depending on which of the three primary macro-economic themes becomes dominant.

Greg also digs into the latest US macro-data, and more importantly offers his thoughts on investment "themes" for 2024, focusing on global equity markets, US industry-sectors, and commodities, including Gold, Uranium, and Ethereum-Bitcoin.

Moreover, if you wish to receive a FREE copy of Greg's "Gold Guru 2024 Year-Ahead Outlook Special" (as he offers at the end of today's episode) shoot us an email at "sales@weldononline.com" 

Transcript

Global Macroeconomic Trends

Speaker 1 0:00

Hi, greg Weldon here with the new episode of Money Markets and New Age Investing, today's focus, I'm going to give you a trilogy, a global macroeconomic trilogy. We're going to visit three places which represent the three different kind of global macro backdrops that we see right now and could see emerge in a lot of places around the world, including the US. We know the signs to look for. I'm going to give you the signs in each of these three places that have already emerged that give us an example of stagflation, inflation and deflation. Those are the three. You know it's one, one or one or the other and we'll see. And you know, obviously, I think stagflation gives us the polarization where we get both more inflation and less growth, which is intensifying the. You know that polarization and each end of the spectrum becomes more volatile. So when we talk about the stagflation scenario, that's going to, that's going to be where we start here. What's interesting about this is it's Switzerland. Switzerland with stagflation Just out last week. Cpi for December 1.7. That's an acceleration to the upside from 1.4. It's the highest level since 2022 in terms of coming off a low, like we saw in 2022 when inflation first started rising. Not only that, you break down the. The components, and two of the largest components are almost double the headline number. So at 1.7 is the overall number, housing 3.3, up a tenth from last month, and food 3.3, also accelerating to the upside from last month. That's kind of seems problematic in some context when we talk about the Swiss National Bank having a policy rate left unchanged to December and in November, by the way, at 1.75 againsta 1.7 inflation rate. Now, there's a reason for that. The reason is the economy is rolling over and it's very evident that the economy is rolling over specifically in the labor market. The unemployment rate has risen three of the last five months. It's gone from 1.9 to 2.3 over that time and sub 2.10 since December alone. It's the highest since March of 2022. Worse, the number of unemployed for December was up 8850, 8,850 people, which in a country besides Switzerland is massive and relative to the labor market. That's a 9.1% increase in a single month in the number of Swiss who are unemployed 9% in one month. Worse, sixth consecutive month of increase in the number of unemployed and over that time frame in the second half of 2023, the unemployment, the number of unemployed in Switzerland, up 23.5%. That's almost 50% annualized. So we kind of understand why the Swiss National Bank is keeping rates at 1.75. Not only that, but at the December meeting, where they left rates unchanged, they told us that they downgrade their forecast for GDP for this year to a range of only 0.5 to 1% growth. Relative to expectations of a 1-9 inflation rate that they've had all year for this year, that they have throughout 2023, I should say for this year, that's a pretty deeply negative real GDP decline. When we talk about, though, the inflation side of it, the Swiss National Bank remains vigilant in the sense that QT quantitative tightening, shrinkage of the balance sheet, letting bonds that are maturing roll off instead of refinancing them or repurchasing them, if you will 19.2 billion roll off. In December alone, the peak in the Swiss National Bank balance sheet was 1.07 trillion Swiss francs as of May of 2022. Since then, you're down 27% in the balance sheet. That's pretty aggressive QT. Now, what's interesting in all of this is that the market agrees with the Swiss National Bank that we need to protect it. Kind of the narrative's changing, and we've been talking about this narrative shift for several months, dating really back to kind of August of last year, specifically, even in the US, but in this case, it's shifting from fighting inflation to protecting the economy and, in the case of the Swiss forward interest rate, complex. What we see is the one year rate is at 156, compared to 175 policy rate. You're pricing in some chance that the Swiss National Bank actually cuts rates this year. The two year Swiss bond is at 115. That's 60 basis points below the current policy rate, which means you're pricing in at least two cuts. You go all the way out to three years at that 104. So you're looking for three cuts over the next three years. Now that's actually significant because that would take the Swiss National Bank's policy rate back to 1%. All right, so keep that in mind. Now, what makes all of this even more interesting with Switzerland and makes this a case different than might be the case in the US, if we were to see stagflation, or in Europe, if they were to see stagflation, is that the Swiss franc is appreciating and right now is among, if not the strongest currencies in the world. All right, it's rallying against the dollar. It's actually at a new all-time high against the Chinese remnimbee but, more importantly, against the euro currency, we're nearing 120, 1.20. Why is that important? Well, that's important because that was the ceiling that the Swiss National Bank set that they defended repeatedly in 2015 when the Swiss franc was threatening to take out 1.20 against the euro. Will they sell again? Will they intervene again? I think that's something to look for here and would be very interesting. All right, but what's really even more interesting is to take it to the next level of thought process here, where you note that the one place where the Swiss is appreciating that you might not expect is against gold. All right, the Swiss franc is not lower against gold when almost every other currency in the world is. This means the Swiss franc is the flight to safety vehicle right now, beyond gold, even beyond crypto. All right, and in that context, that capital flow is causing the Swiss market index, the SMI, the stock index, to break out. You have a double bottom that was recently set right at the 50% Fibonacci retracement, the entire rally from the pandemic low. You get above 11,600 in the SMI in Switzerland. You know you have the five-year moving average playing in here and so on and so forth. That would be a major breakout and would suggest that the you know the capital flow is enough to drive the stock market Really interesting, especially when there's no growth. I mean, this is all about finance, not about the economies. So let's go to deflation. Where do we have deflation, kind of across the board, as the as the dominant macro theme? It's China. Cpi just released, also last week, the third straight month of outright year-of-year deflation 0.3. All right. The only other time, the only other time you had three consecutive months of deflation and CPI in China was the third quarter of 2009, during the crisis. All right. Worse than that is, you've had several unchanged months here where inflation was flat year-of-year. So when you flip the switch to look at the different measures, there's only one of the last seven months where inflation has risen in China. Even worse, the core rate double the headline rate in terms of the depths of deflation, at minus 0.6. What makes that interesting is that every single time we have had this situation of multiple months of deflation in China, with the core rate below the headline rate, it's been a global recession shortly thereafter or during a global recession. Four times 97-98, which was a global emerging market, fx and debt crisis. The Fx started in Asia, spread to Brazil and Russia, where the bonds got whacked and they defaulted on debt. 2000,. 2001, during the tech bubble crash. 2008-09, the global financial end of pandemic in 2020. And now this is the fifth time in the last 30 years that this has happened in China, with this kind of deflation. Four out of four have been recessions and crisis periods. What's not to think that you're not going to make it five out of five? What's interesting here, too, is that exports in China rose for the second month in a row on a year of your basis. You might say, well then, you can't call it deflation. Well, I would make a little nuance on this one, because when we break down China's trade numbers by trading partner, the results are kind of jaw dropping. They're not surprising, but the degree to which this is happening is shocking even to me. I've been watching these numbers and when we reach this point and here's what I mean Exports from China, on a year of your basis in December, to the European Union down 2%. To the US, down 10%. To Japan, down 7.3%. To Brazil, up 20%. To Russia, up 46.9%. So let me repeat that Exports from China to the EU down 2%. To the US, down 10%. To Russia, up 47% Do we see the shift? Let's take it further For all of 2023, 2023, I should say trade with the US, with China, down 11.6% versus 2022. Trade with Russia up 26.3% versus 2022. And then let's take it to the final phase here. Total trade with Russia is up to $240 billion, versus trade with the US, which has fallen to $664 billion. So you have it now that Russian trade is more than one third as much as this trade with the US. If you were to take it all together, they're 25%, and trade with Russia at $240 billion in 2023 is a record high, of course. Of course it is. Now it gets even more interesting because the next place I'm going to take you is to not next place, but the next thing is going to be Xi, who just released I believe this was on Friday, it might have been Thursday of last week, friday of last week, before the holiday weekend here is a new cooperation agreement with Saudi Arabia, signed by China. Okay, xi. Basically, the core of the deal is energy and what Xi has told the press conference about this again Thursday or Friday, I forget which was the we are going to first priority is an all-dimensional energy policy. Quote, unquote all-dimensional, because they're talking about the kind of the components of this specific trade. Part of this deal is that China will supply parts for solar energy creation, and Saudi Arabia will then use that and then ship that energy back to China. So there's specifics here too, but in terms of the quote, let me just let me just read what Xi said An all-dimensional energy cooperation is our first priority. The two sides will work more closely on clean and low carbon technologies involving hydrogen energy storage, wind and other types of power, smart power grids, as well as localized production of new energy equipment, although they're solar due. We will jointly establish a China GCC forum on peaceful use of nuclear technology and China's Nuclear Security Demonstration Center. Saudi Arabia and then just goes on to say this from Bloomberg Saudi Arabia has no nuclear power generation right now, but is looking to add 17 gigawatts of capacity by 2040 and looking to bring two capacity, two reactors online within the next decade. This is part of the Uranium story, and let's not forget who refines the most Uranium Russia. Who produces the most Uranium? Kazakhstan. Who got into a deal for energy at the Olympics in China Russia, china and Kazakhstan. Are we seeing where this is going? Come on, man, do we not get this? What was interesting, though and again we're going to mandel Obama all over the place and taking it up a notch everywhere today. But when we look at the other dynamic in this deal between Saudi Arabia and the other priorities finance and investment, science and aerospace and here's what she says we will have new highlights in language and cultural cooperation. Language and cultural cooperation has the US ever said that to anybody? No, it's always our way or the highway. Xi is just out playing the US every step of the way. And, of course, if you look at a map, it's very obvious to see why China is doing what it's doing. Because of the shipping lanes from Saudi Arabia, iran, iraq, you know all of these oil producing states. The United Arab Emirates cutter. I mean the whole dynamic flows right past the Philippines and Taiwan and you know Korea, and I mean it's just so easy to see Vietnam. How this all plays out, it's domination on that side of the world versus this side of the world is how it kind of comes down to. But let's take it a step further, because one thing that's happening also is very important. Number one the Chinese room to be. Xi said this morning and it's Tuesday morning here Xi said this morning that he wants to see a strong currency as a means to get a deeper dynamic as a financial center setting up as want to be the financial center of that side of the world. So and I've told you and I've told all my clients and I've been talking about this since 2018, they will play the dollar card at some point in time. And this is interesting, that Geo suddenly brings the dollar and play at the same time. He's threatening the Philippines this morning because the Philippines congratulated the new time when he's president. I mean, come on, man, they're laying the foundation, they're setting up the reasons, the catalyst, and then they can say well, see, we told you, we told you, you do this. It's an act of war against us. We're not the ones starting this. It's like a bunch of kids. He started it? No, he started it. What was the catalyst? We're the one that kind of picks, picks, picks and prods the other person into starting it, and then they feel like they're justified. Kind of interesting. Within that same context, note the Shanghai composite stock index is at a three year low and is breaking down. The industrial sector eight year low. Infotech all time low. Finance all time low. Materials low since 2020. Stock market's cracking there and that's not that big a deal really, because she doesn't care as long as unemployment's not skyrocketing and youth unemployment is under control. That's fine as far as she is concerned. Doesn't really care about the capitalist side of this in terms of well, we need to make sure stocks go up all the time, because all of our credit will collapse if we don't have continued growth in wealth and collateral. Again, I'll play this every day of the week, all right. So number three on our trilogy list today is the inflation point. Where is it actually happening, where it's kind of coalescing in a real positive and I use that word lightly when I talk about inflation, but nonetheless where you have a situation where you can have growth because wages are at the top of the inflation ladder? It's Japan. Would you believe it? Japan, the land of the rising deflation for the last 30 years since 1990 and the unique eye crash all right, with a big debt and credit problem at the time? All right, do we not? Sound familiar? Is Japan is now like in the zone man All right? And we see this in the context of what the Bank of Japan has kind of been saying to us. In other words, here's comments from their December meeting Private consumption is increasing steadily. Corporate profits are at high levels. Wages are expected to continue to accelerate wages for the year 2023 versus 2022. And this is the minimum wage, like the lowest average 4.2% up. 4.2%. That's pretty good, even against the inflation rate that's around, you know. Two and change that's really good. 2% positive, real, real wage growth supports higher prices for everything. I mean gosh forbid. We would think about this in about Japan in the 1990s, in the 2000s. We've never said you know, come to 2024 and the place is going to be rocking. The place with the positive inflation, the place with the growth, the place with the hottest stock market is going to be Japan Retail sales posted their 21st consecutive month of year-of-year growth. 12 of the last 13 months of Japanese retail sales year-of-year numbers have been above 5% growth. December was 5.3%. Let me say that again, 21 consecutive months of growth in retail sales and 12 of the last 13 months the growth was greater than 5% year-of-year. That is robust to the max. Man All right. And the last time we saw anything like this in Japan was in the 1980s, before the 1990 crash in Japanese Nika. It's backed up by a labor market and wages that are robust as well. The number of employed rose 560,000 in December. What if the US killed for a number like that. All right, the 2.5% unemployment rate, which of course, fell to 2.5% well, the lowest since 1990. And what makes this really interesting is this has all taken place as the Bank of Japan has restarted printing money. They have restarted the expansion of their balance sheet, which is what hit the end really hard. When you have the situation where you have this kind of inflation, that's kind of static. You have a central bank that is supporting the economy by printing money and you actually have it working in the labor market to the point where it's driving wages to where people are spending like crazy in Japan. I mean, that's huge. So what happens? The Nika is breaking out. We got long for our money management clients really well on this, because of course we see it coming, because they dig so deep. My weakness, if you will, is that we tend to be early, because I dig so deep into these numbers that I see it kind of before everyone else, not them smarter. And once I work harder and by digging into the numbers and pulling out all these things and connecting the dots, I can kind of maybe tell what I think is going to happen, and when I start to see it happening, I jump on it. The problem is you need more people to see it happening to make it have an impact in the markets. So I tend to be early, but we were right on time with the Nika position. We got long. The Japanese stock market Right now it's at the highest level since 1990. And the pre-crash high was $39,900. You're currently at $30,000,. We're already above the 2020 high. So right now you're around $34,000. I'm going to have to look real quick here. Nika, nika, nika. Where is the Nika? I can't find it on my screen. This is the new screen. Here. It is yeah, $35,660 right now. What's even more interesting there is the retail sector is the best performing sector in the entire stock market. It's at an all-time high. It's up 39.2% since the 2022 low. I mean just stellar performance right now in Japan. Within that context as well, too, the fixed income market. This is part of what's driving. It is basically suggesting there's no need for the BOJ to be hiking rates. The two-year JGB just went back to zero. The one year is back to minus 10, which is the BOJ's policy rate. So you're not expecting any rate hikes and yet the long end is kind of absorbing that in a way that suggests the inflation will continue to grow Because the 40-year, 30-year curve, when you talk that 10-year tronch after the 30 years, after 30 years, you have a difference of 26 basis points in that 10-year frame. That's the high since 2011. So it's interesting to see how this all plays out, because what it really does suggest to us, the NICI, has legs. This will continue and there really isn't a major threat here outside of geopolitical events in Japan. And that's really amazing, because I don't know the last time I said that, if ever, so let's take this to the US. And what is the strategy here for people in the US? Well, the problem in the US is you keep talking about how strong the labor market is and you champion a 200 and something raise in increase in non-farm payrolls in December, reported in the first week of January, and yet that number was horrible. And you have the Bureau of Labor Statistics, you have the Labor Department, you have Biden's guy coming out and saying see how great Biden is because we have such a strong labor market. No, you don't. That's an outright fabrication and I can pick out. I've done this a long enough. I know. If you want to fudge the numbers, I know the places where you can do that, because you can't do it with everything. I know what the numbers mean. I know how they're constructed, because that's how we tell what it means, and in this case, it did not mean a strong labor market. In fact, it meant the exact opposite. When you look at the household survey, which is bigger than the survey when the non-farm payroll numbers are completed, the number of employed in the US in December fell by 683,000. Let that sink in for a second. The number of employed in the US in December fell by 683,000. The number of people that dropped out of the labor force 845,000. Wow, the participation rate fell, of course, and you have the U6 rate now above 7. I mean, it was six and a half in December. It's 7.1 December of 2022. December of 2023, it's 7.1, it's up six tenths over the course of 2023. That's not a robust, healthy labor market. The number of people working part-time for economic reasons rose 217,000 in December. That covered the entire non-farm payroll gain. So what you could say these numbers are not the same, but what you could say is the entire rise that everyone's calling so strong, particularly the US administration, in employment in December was part-time jobs. More than that, the bulk of those jobs were self-employed. That sounds more desperation to me than anything. But you want to talk desperation? Here's the stat that you can use as a party conversation starter. The number of people in the US working two jobs, where both are full-time jobs, rose actually rose to 390,000. Didn't rise by rose two. So the total that are now working two jobs where they're both full-time jobs is 390,000. This is an unprecedented run where we've been above 350,000 for several months in a row. There's only four times we've seen this dynamic in both jobs are full-time jobs, because that screams stress. That screams that people are struggling to pay their bills. If you're gonna work two full-time jobs, you don't do that because you're happy in life and you have plenty of money and the bills are not causing you stress. Only four other times this has been the case 2008, 2018, almost had a recession and 2021. That's it. Let's go one step further, because the ISM service sector survey out the first week of the month was really interesting. Why? Because the service sector has been supporting the economy throughout 2020 2023. Without growth in the service sector, you would have no growth. The manufacturing sector is in a recession, waiting for the service sector to crack and it's cracking I've been talking about this now for the past three or four months in the front of the production line, in other words, the shipments, the new orders, the backlog of orders all these have been weak. What it hasn't hit because it's a lagging indicator, which is mind-blowing that the Fed uses it like a leading indicator has it hasn't hit employment yet. So the service sector has been single-handedly supporting employment. Well, that may be ended, because the service sector ISM service sector survey employment index fell 7.4 points in December. Now that doesn't sound like a lot. That's a crash. That's a crash At 43.4 is the lowest since the pandemic and the only other time it was at this level was in 2008. It didn't even get this low in 2020 during the tech bubble crash. So this really makes you wonder about the employment, and if the labor market is not as strong as they say, then the economy is much weaker than people are saying. Well, consumers are still spending. Yes, they are. Why? Because they're continuing to borrow. Consumer credit rose 24 billion the most recent month, which was almost three times what was expected. I mean, it really seems unprecedented and it seems unsustainable to me when you see the bank bounty, commercial bank bounties. The Fed publishes numbers on this every week. The latest week shows that loans of all kinds fell, and I mean the total balances, in other words, the amount of money that's out there from banks, fell. That's a rarity, man, and it's fallen out a couple of weeks out of a couple of weeks. But what's really interesting here is that everything fell except one category credit card loans. Now, when you take the entirety of it, all the loans you know, commercial real estate, residential real estate, consumer is everything, businesses. It's all in these numbers. The 52 week rolling change, in other words, the ongoing, you know, year-over-year change, so to speak, on a weekly basis, is $277 billion, and that seems like holy mackerel. A quarter of a trillion, that's huge. We had the huge 2023 in terms of loan growth, didn't we? Well, not by the end of 2023, we didn't, because that's the lowest non-pandemic number since 2014. Relative to the numbers for the last 25 years, it's a recession-like number. It's subpar at best. So all the dynamics I've been talking about in terms of commercial real estate and banks are in play here, and I don't know if you saw 60 minutes last night. It's not something I normally watch, but I heard it was going to be something about commercial real estate in New York and I wanted to watch it and holy mackerel, I mean. You know. Again, office space, you know vacancy is really a problem and the amount of defaults already on New York City office space and buildings is mind-blowing and banks are going to get hit is why I don't like the financial sector. What do I like? I continue now to have shifted to kind of more defensive. I keep an infotech because that's the high flyer and it doesn't show any signs of slowing down, at least not in the kind of medium term. But some of the other areas industrials and consumer not so good anymore. Where is it? It's more defensive, it's more healthcare, pharma, biotech. Those are some of the areas I can give you specific stocks. You want to. You know, give us a. You know, reach out. We do what we call the portfolio playbook, where we give specifics on all the S&P 500 stocks, all the sectors. What are the hottest stocks? What are the hottest sectors with various portfolios that are driven quantitatively and discretionarily for different types of investors? Right, there's an international need here too. There is a need for some commodity exposure too, which would include uranium, which would include Ethereum. What I wrote to my clients at the beginning of the year, was Ether to SOAR in 2024. And it has SOAR. It's a major breakout going on in the crypto space and it has a lot more to do with stuff other than just the ETF dynamic. There's a lot more going on there that's quite bullish. Well, countries I'd love to tell you. I'll tell you what I mean. I did my 2024 special, outlook ahead special, and this was our newest product, which is a resurrection of an old product which is called the Gold Guru. So we're talking about the precious metals crypto, all the metals, uranium and crypto. In this new version of the old newsletter we used to do All right, you can get my 2024 outlook special. It's like a hundred pages and don't let that bother you, because it's all charts and it's all easy to read, easy to digest and it's stuff I think you really want to know, all right. So if you want to get a free copy of that, shoot me an email sales at weldononlinecom, w-e-l-d-o-n onlinecom. Or follow me on Twitter at Weldon Live or at money underscore podcast and email me to get the 2024 special. Or if you want to get a trial of our portfolio playbook and actually see exactly what our breakdown is and what sectors we're holding and what specific stocks, which country ETFs we want to hold and which commodity ETFs we want to hold. Shoot me an email sales at weldononlinecom. Thanks for listening. See you next time.