Friday Paper Charts

September 15, 2023

Today marks the 15th anniversary of Lehman Brothers going under. I remember the day very well. I was away over the weekend, celebrating a friend’s birthday in Zurich. I boarded the first plane into London on Monday morning when I noticed a group of nervous men in suits on their phones. I checked my work phone, which had numerous messages and missed calls. Lehman was gone. What happened thereafter was quite a tumultuous week. I will reflect on it in a separate post. Luckily, I had reduced all counterparty risk to the bank to a minimum, but I was oblivious to the following chain reaction.

Fifteen years on, we are still fighting the past demons of ever-extending liquidity injections to keep nominal growth steady. Short-termism has crept into all aspects of the money world. That’s true for both investing and for central bankers themselves.

Looking through yesterday’s ECB transcript, I can not stop marvelling at how reactive monetary policy has become. A year ago, madame Lagarde lamented how inflation came out of nowhere. The council now states that they “consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.” The market interpreted the hike to 4% as possibly their last. Who knows, I wouldn’t bet the farm on it. Reaching plateau rates isn’t something to be cheerful about. The easier money is made in either tightening or easing phases. The very stable plateau rate is wishful monetary thinking. The equilibrium will break and, ironically, give you possibly the worst signal-to-noise ratio out of all constellations.

I couldn’t stop noticing how the esteemed ECB staff remained remarkably optimistic about growth. Real GDP growth forecasts were cut from 0.9% to 0.7% for this year and from 1.5% to 1.0% for 2024. The optimism for the 2023 forecast may be explained by the fact that ECB staff do not seem to have taken account yet of the Q2 GDP revision from 0.3% to 0.1%. The ECB acknowledges that Q3 may be flat. However, the projections still imply that the GDP stagnation of the last few quarters gives way to roughly trend growth (0.2-0.3% growth per quarter) from Q4. That, my friends, requires a great deal of optimism, given that survey and hard data consistently point to a moderate but deepening contraction in Q3, while forward-looking indicators suggest no short-term rebound. On the external side, growth may be troughing in China, but most expect US growth to cool, while domestically, the impact of monetary tightening should intensify once pent-up demand from the pandemic era for both goods and services is exhausted. In the next projections in December, the ECB may have to revise the growth forecast considerably lower again. You can’t run monetary policy by looking at the review mirror.

This week, in ATW, I looked at the 60/40 portfolio and put a few charts for you all to consider. As is the norm, I also provided a few interesting charts and watchlists subscribers should have on their radar for the week ahead.

I also revealed the launch of the Macro Book (PAMB). This is a front-to-back investment process walk-through. It will be fun and interactive. I am excited about that one.

Meanwhile, we have quite a few charts to look at. A brief reminder for all new subscribers. These charts are based on my proprietary momentum and reversal models, which give us indications as to the strength of a trend as well as an indication as to whether an existing trend is exhausting and vulnerable to a reversal.

I receive positive feedback and messages from readers suggesting they find it useful. That is the point, but it is certainly not an ever-correct money-making machine. It helps me navigate markets and cross-reference certain movements across asset classes. It alerts me when to hit the gas and when to break. It is here to help guide me through the jungle. This is an unbiased prism through which I view price action and likely progression and evolution outside the narrative noise, nothing else.

With that in mind, let’s explore what’s happening.