Predictions for 2024 - Global Macro Backdrop, Investment Themes & Events to Watch for
I address some of the investment themes I'm incorporating into my investment plan as well as their timing.
Global Macro
A Challenging Fed in 2023
In 2023 the Fed surprised me as it did a lot of my colleagues. The Fed executed quantitative tightening (QT) and 5-rate hikes in the same year. That sounded impossible to me. While I was focused on the Left hand (The Fed) all the meaningful activity was happening with the Right hand (The Treasury). It was the Treasury that countered all the Fed’s balance sheet contraction from the Fed’s QT program. And, while I was expecting Quantitative Easing to begin formally, instead the Treasury General Account was adding liquidity into markets when needed while the Fed continued its QT program. The Treasury was able to add liquidity enough so that we didn’t have a deflationary crash where all market players sell assets for cash at the same time from a market scare, which typically start in the bond market like in March of 2020.
However, that can’t last forever. The Treasury’s General Account will need to address a lot of government fiscal spending in 2023/2024 and since nothing is getting cut, like defense or entitlements, the only option is to print money once the Treasury can no longer counteract the Fed’s QT program. I suspect the QT program will be halted in the back-half of this year.
The Most Important Two Words
The most important phrase we will need to think about is – “fiscal dominance.”
The Fed’s job, generally, is to promote employment and keep the economy safer and stable. It also has a third ‘shadow’ mandate, which is keeping the Treasury market functioning. They can only tighten until it dysfunctions. When the disfunction happens, they inject liquidity by expanding its balance sheet. We’re getting to a point where the third shadow mandate is dominating the prime dual-mandates. When the Fed spends more of its time and resources managing the Treasury market, that is fiscal dominance. And it’s scary because it’s a vicious cycle.
Once a country’s fiscal debts are in a position where positive real rates of 2% set off a debt spiral – which forces them to print money – that’s fiscal dominance. That’s because if they don’t print the money, the Treasury market crashes, which crashes every other market, with the worst-case scenario being it could crash to the degree of a Great Depression. It’s happened many times in the past decade. Paradoxically, how we got out was through the asset price inflation that transpired from the money printing.
The Fed must support the Treasury market to the detriment of unchecked inflation. It’s a vicious cycle. Now imagine when all market participants realize this. Investors will take advantage of the asset price inflation and we’ll all be stuck with the higher inflation (because the Fed can no longer do what’s necessary to fight inflation (because it would destroy the Treasury market that would take down the entire financial system.) And so, the circus goes on! (There’s a great podcast with Luke Gromen as a guest where he explains fiscal dominance - I recommend it, here.)
We saw this in Q1 of 2023 when those regional banks like Signature Bank and Silicon Valley Bank were under pressure. In the podcast, Gromen tells us that event in March was a Treasury problem not a banking problem because the 5 rate hikes killed the value of the bonds, they were holding on their balance sheet. It was friendly fire. The Fed had a choice and could let the hard landing come, but they didn’t because the cascading effects would bring a global depression. They didn’t have to bail out those banks. Again, we have yet another example of moral hazard. And it’s going to continue!
2024 Expectations
Well, I now do not believe we will have a recession in 2024 like I originally thought. Because all the Fed’s actions, like weakening the US Dollar, which is inflationary and stimulative. We’re all now clear the Fed is going to step in when the Treasury market breaks. They have proven this, so we know they are going to print money when that happens.
In 2024, the economy has some cracks with regional banks again, but now inside the commercial real estate sector. There are a lot of loans coming they can’t be paid back. My high-conviction base case is that we will have another Treasury market breaking event, like the regional banks last year, in 2024. This time though, I’m going to put the pedal to the metal, not step on the brakes.
We’ll be watching the Dollar Index (DXY) and the Bond Volatility Index (MOVE) to let us know when this Treasury market disruption may be here. We will also be watching the Treasury’s General Account balance to see if it’s getting low. We’re going to be looking for negative events that would generally have a horrific macro backdrop as opportunities and, instead of pulling capital out of the markets to avoid downside risk, we anticipate counter-intuitively deploying more capital. This makes sense considering that we are in a bull cycle and importantly because they Fed has clearly demonstrated they will be there to step in. When they add the liquidity crypto goes up meaningfully, just as in March of 2020 and March of 2023, and we’ll want to take advantage of that. In general, we also need to remember that we’re in a sovereign debt bubble and it’s bursting (slowly for now). I talked about this in my first book, Age of Autonomy.
Risks
Timing - Events to Watch Out For
Here are some times throughout the year you may want to be extra mindful.
Keep reading with a 7-day free trial
Subscribe to The Age of Autonomy Update to keep reading this post and get 7 days of free access to the full post archives.