Is Macro Regime Shift Underway? ft. Andreas Steno & Mikkel Rosenvold

Macro Mondays on Real Vision: Summary – February 5th, 2024

Key Concepts:

• Macro Regimes: A framework categorizing economic environments based on growth, inflation, and liquidity trends (QE-like, Gung-Ho).
• Nowcast IQ: Real Vision’s proprietary service for real-time economic forecasting.
• Clarity Act: Proposed US legislation aiming to define the regulatory framework for digital assets (crypto).
• Capex Cycle: Increased capital expenditure by companies, driven by incentives like bonus depreciation.
• Regime Shift: A fundamental change in the prevailing macroeconomic conditions.
• Golden Dome Project: A potential US missile defense initiative.

I. Market Volatility & The Silver Crash

The episode began by acknowledging the increased market volatility experienced the previous week, following a relatively stable start. Andreas Umbach attributed a portion of this volatility to the spillover effect from a significant volatility shock in the precious metals market, specifically silver. He explained that a sudden volatility increase in one asset class forces fund managers to reduce risk exposure across portfolios, leading to pullbacks in various trades – including data center stocks, technology stocks, and other metals. This is a mechanical process driven by risk management protocols.

II. The Kevin Warsh Nomination & Federal Reserve Policy

A significant portion of the discussion centered on the nomination of Kevin Warsh as the next Federal Reserve Chair. The analysis, based on an Economist word count analysis of Warsh’s speeches since 2006, revealed a strong correlation between his views and the political affiliation of the sitting US President. However, the key takeaway was that Warsh appears to be tasked with facilitating a closer cooperation between the Federal Reserve and the political administration, aiming to support economic growth through the private system. This was described as a potentially “incredibly bullish backdrop” as it suggests a more coordinated approach to monetary and fiscal policy. The possibility of a Trump supermajority on the Federal Reserve board was also raised as a further factor influencing this potential shift. Andreas explicitly refuted the notion that Warsh is inherently hawkish. A quote highlighting this perspective: “They want central bank to play a smaller role in the economy to the extent possible. But they want the central bank to cooperate with politicians on how to create a strong economy via the private system.”

III. Macro Regime Shift: From QE-like to Gung-Ho

Utilizing Real Vision’s Nowcast IQ service, the discussion highlighted a shift in macro regimes from “QE-like” (decent liquidity, weak growth, low inflation) to “Gung-Ho” (improving cyclical growth, low inflation, positive liquidity). This shift is primarily driven by a resurgence in capital expenditure (capex) fueled by bonus depreciation rules within the US tax code. Companies, including Alphabet and Amazon, are increasing capex beyond expectations. Andreas emphasized that this capex cycle is occurring simultaneously with potentially the lowest inflation reports of the year (currently around 0.1% monthly, while consensus forecasts 0.3%). This combination of cyclical growth and low inflation is considered a significant development. This regime shift suggests a rotation out of recent popular trades (like precious metals) and into sectors benefiting from economic growth, such as consumer staples, industrials, and energy. A key point: “watching the reporting season last week for example with alphabet…we still see rise in capex also relative to expectations…that is to me a testimony to what we've been saying for uh three four months straight that uh the capex window this year is one that you're going to utilize no matter whether you want it or not.”

IV. Cryptocurrency & Political Influence

The discussion touched upon the evolving political landscape surrounding cryptocurrency. Donald Trump’s renewed focus on crypto, as evidenced by his recent tweets, was analyzed. While acknowledging the potential benefits of a more favorable regulatory environment (through the Clarity Act), Andreas expressed skepticism about the sudden embrace of crypto by previously critical figures. He noted that crypto holders are politically divided and that the Democrats’ attempts to link Trump to Bitcoin’s drawdown were perceived as arrogant. The expectation is that the Clarity Act will be a key battleground ahead of the midterms, with Trump aiming for Bitcoin to reach new all-time highs before the election.

V. Elon Musk, SpaceX & The Space Tech Trade

The shift in SpaceX’s focus from Mars to the Moon was discussed. Andreas suggested this move is strategically aligned with NASA and securing funding ahead of a potential IPO. He downplayed the idea of space-based data centers, arguing that the current space tech trade is primarily driven by missile defense initiatives, specifically the “Golden Dome Project.” He characterized the space tech trade as a contrarian bet that has yielded strong returns in Real Vision’s portfolio.

VI. Geopolitical Risks: Iran

The episode concluded with a warning about escalating geopolitical tensions surrounding Iran. Talks between Iran and the US have stalled, and Prime Minister Netanyahu is scheduled to visit Washington D.C. with a potential proposal for military action against Iran’s nuclear facilities. This situation poses a significant risk to market stability and oil prices. The hosts emphasized the need to monitor this situation closely.

VII. Real Vision Updates & Actionable Insights

The hosts promoted Real Vision’s services, including the Alpha Chair, the Drill, and the Pro portfolio update. They highlighted the value of Real Vision’s research and analysis in navigating the current macroeconomic environment. They reiterated the importance of being prepared for potential market shifts and emphasized the need for actionable insights.

Conclusion:

The episode presented a nuanced view of the current macroeconomic landscape, highlighting a shift towards a more growth-oriented environment driven by increased capex and potentially lower inflation. The analysis emphasized the importance of understanding the interplay between political factors (Kevin Warsh, Trump, Iran) and economic trends. The hosts provided actionable insights for investors, suggesting a rotation out of defensive trades and into sectors poised to benefit from the evolving macro regime. The overall tone was cautiously optimistic, acknowledging the inherent risks but emphasizing the potential for positive returns in the coming months.