EPB Macro Research | Free Research

Executive Summary

• There's a cyclical shift in sight.
• Shorter leading indicators have started to peak.
• Coincident indicators are still rising.
• The probability of a downturn in economic growth is rising.

Cyclical Shift in Sight

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The probability of an economic inflection point is rising based on leading economic indicators.

An inflection point in economic growth requires a change in asset allocation. 

When...

Executive Summary

• Long-term bonds have been a powerful addition to any portfolio over the last few decades. Over the multi-year view, that will remain the case.
• Long-term bonds perform poorly when nominal GDP growth is increasing or is expected to increase. This is because the long-term Treasury rate will move with the long-term fluctuations in nominal GDP growth.
• High levels of government involvement in the economy, mainly in the form of transfer payments, will reduce long-term growth.
• ...

Executive Summary

• Preliminary Q1 GDP data was reported and showed strong cyclical momentum in the US economy.
• The housing sector and durable goods consumption sector continue to show outperformance, a positive cyclical signal.
• It is highly uncommon to see an economic downturn while housing and big-ticket consumption are rising.
• The secular economic conditions are still pressing downward, highlighted by a persistently weak measure of velocity, but there are no signs of downside cyclical...

Executive Summary

• Interest rate policy has failed to generate an increase in the growth rate of real GDP per capita.
• After interest rates reached the zero-bound, expansionary monetary policy in the form of Quantitative Easing was tried, and the results have proven ineffective.
• After failed attempts to stimulate real GDP growth through interest rate policy and monetary policy, we are now attempting to generate lasting economic activity through fiscal policy.
• Decreases in the marginal revenue...

Executive Summary

• A period of aggressive monetary and fiscal support has ushered in a consensus view of sustained inflation.
• Today's initial conditions are far different from the start of the last two inflationary episodes in the 1940s and 1970s.
• Inflationary pressure will emerge over the next couple of months, but transitory/cyclical inflation and sustained inflation are different.
• Without a clean balance sheet, high real GDP growth, or a boom in demographics, sustained inflation will be...

Executive Summary

• Broad money supply has surged to record levels in the United States, causing inflation fears and overstated claims citing the US Dollar demise.
• A money-centric view of the economy ignores our economic system's foundation, which states that money has an equally important counterpart - velocity.
• It has become fashionable to denounce velocity as a measure of our economic and monetary system, but that still does not change what the measure of velocity is telling us.
• Today's...

Executive Summary

• Interest rates are rising with a speed that is being referred to as the "taper tantrum 2.0"
• Are yields really rising due to an expectation of the Fed reducing the size of its balance sheet? No.
• Yields are increasing because growth and inflation expectations are rising, combined with an uncertain regulatory backdrop adding fuel to an existing trend of higher interest rates.
• The direction of interest rates (higher) is correct, but the speed is likely an overshoot, something...

Executive Summary

• Cyclical equities continue to outperform large-cap "defensive" equities.
• The Treasury curve is bear steepening as long-term yields rise and short-term yields remain flat-to-down.
• Leading indicators of cyclical inflation pressure continue to point higher, which will pressure long-term bonds and support cyclical equities.
• Corporate credit spreads highlight the exuberance and lack of caution in risk-assets.
• While cyclical growth and inflation indicators remain higher, risk...

Executive Summary

• Gold plays a critical role in preserving wealth and should be considered in a context beyond a securities portfolio.
• The long-history of gold and correlation to real interest rates makes gold a sound proxy on the price of money.
• Gold also serves a separate role in a diversified securities portfolio, outpacing risk assets during large declines in real interest rates.
• Investors should consider "linking" or "backing" a percentage of net wealth in gold, in addition to the...

Executive Summary

• Short-term interest rates are coming under pressure in a fashion that will require the Federal Reserve to defend the zero-lower-bound.
• Rapid growth in total banking reserves will cause banks to lower the rate on some deposits to limit their balance sheet growth, which comes at a cost.
• The demand for Treasury bills from money market funds and the Federal Reserve will outweigh the limited supply of new bills in 1H 2021 due to an overfunded TGA.
• The Federal Reserve will be...