A Summary of Our Major Themes in 2023
Our Market Notes reports are available to you in PDF format. Click below to download.
First, an update:
Last year, we at Consilience Asset Management added a Macro-Economic component to our Relative Capital Flow Model*. Using market action, through a process of reverse engineering, we seek to identify which macro-economic climate is being represented in the market at any given time.
This is an important addition to our discipline as central banks across the globe are attempting to unwind decades of monetary expansion. As this unwinding occurs, it could have significant ramifications for the financial market. Thus, there is an increased need to monitor this process and the corresponding macro-economic result.
Below are the ratings of securities in the five scenarios that we are monitoring:
Inflation – Negative,
Deflation – Negative,
Stagflation – Neutral,
Recovery – Positive,
Financial Crisis – Neutral.
The above scenarios reflect the current Capital Flow* composite rating of the securities that have historically generated positive returns in the above economic environments.
In addition, our Global Macro Indicators* are as follows for the seven asset classes we invest in for our clients:
Global Equities – Positive,
Global Bonds – Neutral,
Commodities – Neutral
Gold – Neutral
U.S. Dollar – Neutral,
Real Estate – Positive,
Cryptocurrencies – Positive.
Now, to this month’s report:
As we enter the final month of 2023, our message remains the same, “manage risk in these very uncertain times.”
We are looking at debt at an all-time high, geo-political risks at crisis levels and economic uncertainty with the risk of a recession at cycle highs… yet the stock market has been rallying for much of 2023.
So, it seems that something must give. Either the risks are overstated and will recede, or the stock market will retreat.
The economy and markets are giving divergent views on US recession risk, with the recent performance of several assets sending out a more negative message than justified by the economic data. Oil has slumped, copper is weak and US interest rates markets now expect almost 1% of cuts next year. But this is all contrary to an abundance of economic data from the National Bureau of Economic Research (NBER) that indicates the risk of a recession is in fact receding.
Which one is right then, the market or economic data? A snapshot of our current indicators above suggests the latter. But as we have found in recent years, things can change very quickly.
In this month’s report, I will look back at the year and summarize the highlights from our 2023 Consilience Market Notes. Here we go…
From our January 2023 Report:
The primary driver for the financial markets has been, “the Fed’s money printing operation… [which has] artificially fueled the stock market to record levels as shown below.”
From our April 2023 Report:
An introduction to the Fed’s dilemma…
First, they printed trillions of dollars following the 2008 Global Financial Crisis in a process called Quantitative Easing (QE) to “save” the economy and financial markets. This excessive capital resulted in inflation (a reduction in the purchasing power of the dollar).
Next, to fight the inflation that they created, they have attempted to reverse course and reduce dollars and raise interest rates in a process they call Quantitative Tightening (QT).
From our February 2023 Report:
Has the Federal Reserve engineered a soft landing for the economy while curbing inflation? Has the current administration introduced a durable plan to address our ever-expanding debt without crashing the economy and the markets?
If not, then what is driving the financial markets higher in recent weeks?
There’s an old expression coined by political strategist, James Carville, “It’s the economy, stupid.” That may have been an astute political observation when he made the statement in 1992, but today, price moves in the financial markets bear no resemblance to the economy. No today, as our statistical work suggests, “it is absolutely not the economy.”
For example, while the stock market has returned more than 180 percent since the 2007 peak, that increase in asset prices was more than 6x the growth in real GDP and 2.3x the growth in corporate revenue.
As pointed out on numerous occasions in our Consilience Market Notes, rather than the economy, it’s been Central Bank money printing or Quantitative Easing (QE), and zero precent interest rates that have been the primary driver for rising stock and bond prices.
As shown below, while the Federal Reserve was engaged in money printing/expanding their balance sheet, the stock market rose. When they reversed course last year, stocks declined.
From our May 2023 Report:
Remember, when the US prints new dollars, they offset these dollars with new debt.
As the next chart below shows, the increased rate of borrowing has vastly exceeded the increase in the US economic growth. If federal debt had tracked GDP since 1990, it would be around $16 trillion, half of its current $32 trillion.
In 2010, respected economists (Carmen Reinhart and Kenneth Rogoff) concluded that at a government debt to GDP rate of over 90% it becomes exceedingly difficult for a nation to grow its way out of its debt burden…
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