Darius Dale, Chief Strategist & Founder at 42 Macro LLC joins us for an end of Q3 360˚ take, looking back at the last year for context, and looking forward to 2024. He shares his insight from his firm’s econometric modeling, and what it is all saying about the economy and markets behaviour for the upcoming quarters and year ahead. Dale eloquently unpacks all the factors driving inflation and market in the context of today’s heightened uncertainty surrounding inflation, policy, rates, and market dynamics.

Timestamped Highlights

[00:02:25] Darius Dale believes that factors supporting growth persist into next year, inflation has surprisingly decreased, and the Fed’s policy remains unchanged.

[00:04:19] China’s economy reopening without fiscal stimulus, Europe’s growth faltering with sticky inflation causing bond market volatility. Bank of Japan likely to tweak yield curve control. Implications for asset markets.

[00:06:55] Despite concerns about inflation, consumer income and personal spending have exceeded inflation levels. Limited vulnerability in the credit cycle and decreased exposure to the manufacturing sector indicate a more resilient economy.

[00:13:17] Darius Dale’s insight, discussing a temporary risk-off scenario, the expectation of a return to equity leadership, and the potential lag in seeing the impact of interest rates on the economy. The author questions whether these circumstances will lead to a leapfrogging of debt maturity.

[00:16:41] Stock market tends to peak with employment cycle, indicating potential retail risk accumulation. Difficulty in answering question of factor dispersion.

[00:20:09] University of Michigan employment survey shows numbers inconsistent with recession patterns. Other indicators also suggest recession is unlikely.

[00:22:14] Most US mortgage holders have 30-year mortgages at low rates, so rising interest rates will take time to impact the housing market.

[00:26:04] There have been few changes in central bank policy rate expectations, but significant moves in floor policy rates, led by the US. The US economy has been performing better than expected, causing investors to believe there is no recession. The fixed income market has seen interesting trends, with minimal impact from the regional banking crisis.

[00:30:48] High interest rates will discourage refinancing for both corporate and household sectors; longest duration since the early 80s.

[00:31:53] Refinancing into higher interest rates is economically irrational. Rates will matter eventually, but not now. The Fed’s policy has created a big spread between payments and instrument yields, dragging it into a higher rate regime.

[00:35:27] The mortgage rate spread is causing stagnation in the housing market, leading to a decrease in existing home sales and an increase in new home construction.

[00:40:37] We discuss the potential for higher inflation and the use of a model to project inflation trends. It suggests that the underlying trend of inflation may be around 2.5% to 3%.

[00:44:07] The author specializes in building quantitative models backed by proven techniques. They developed an investment strategy to outperform the standard 60-40 approach by reducing bond holdings and using various risk management overlays.

[00:48:50] We discuss the inflationary era in bond market, potential for term premium to rise, bond bulls buying undervalued market.

[00:52:05] 42 Macro publishes research and prognostications on the market. They made successful calls in early January and May based on their process. They focus on behavioral aspects and reorganized their process for better outcomes.

Visit 42macro.com for more.