Darius joined our friend Anthony Pompliano this week to discuss the JPY carry trade, the 42 Macro Weather Model, the 42 Macro GRID Model, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. What Caused The JPY Carry Trade?
The unwind of the JPY carry trade is gaining attention because many global financial institutions have used the low-yield Japanese yen to fund their leveraged positions.
Japanese yields have been significantly lower than those of other major central banks, making it cost-effective to borrow in yen and convert to USD, Euros, or other currencies for investments.
We are starting to see the beginning of that unwind now.
2. What Does Our Macro Weather Model Indicate About The Outlook For Asset Markets?
The 42 Macro Weather Model, which provides a short to medium-term outlook across the five major asset classes, is currently signaling a neutral outlook for the stock market and Bitcoin, suggesting baseline returns and volatility over the next three months.
Various fundamental factors, including an uptrend in global liquidity, projected rate cuts, and a projected decline in the unemployment rate, support this outlook.
However, we remain optimistic about the overall performance of these asset classes, as we don’t anticipate significant economic risks in the US that would force the Fed to cut rates more aggressively, which could otherwise hasten the unwinding of the yen carry trade.
3. What Does The 42 Macro GRID Model Indicate About The Outlook For Global Economies?
Our 42 Macro GRID Model indicates that the US economy is likely to enter a DEFLATION Bottom-Up Macro Regime in the third quarter, with both growth and inflation slowing. Despite this, we are not worried about asset markets. Our GDP growth estimates are significantly higher than consensus, and our deep dive into business cycle analysis suggests there is a limited risk of a recession in the US economy over the medium term.
Moreover, we believe inflation will likely bottom out in Q4 before rising in 2025. That could pose a future market risk, but isn’t an immediate concern at this time.
Global economies are largely diverging from the US, with most of the world likely to remain in a GOLDILOCKS Bottom-Up Macro Regime throughout 2H24, and the growth accelerating + inflation deceleration dynamic is a typically supportive backdrop for asset markets.
That’s a wrap!
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