LOCKED MI2 Trader: Good is Bad
Today’s Empire Manufacturing is more evidence that animal spirits are surging and that the Confirmation phase is starting in earnest.
November 15, 2024
Today’s Empire Manufacturing is more evidence that animal spirits are surging and that the Confirmation phase is starting in earnest.
Last week, we sent you a piece outlining how we believe that when it comes to pricing the Trump victory, markets will go through three stages.
As we all sit on our desks waiting for today’s election results, we thought we would make a few quick observations.
As we discussed on our recent trip to London, when we look at the risks facing the US economy, they look increasingly binary with the odds of the tail risks, i.e. a no-landing or recession, far higher than the generally assumed soft-landing. That isn’t an easy trading backdrop, especially when one of the deciding factors is an election that, at best, is too close to call and, at worst, could end up being bitterly contested. At uncertain times like this, we tend to lean more heavily on price action, and we wanted to share some of the charts on our radar that are at make-or-break levels.
In the spring, when we set our thesis explaining why we were approaching a possible peak in US Exceptionalism, we knew that the macro call was easy, with timing and risk management the real challenges. Adding to this complexity, reversing a trend that has dominated markets for at least a decade and, as a result, had both inertia and enormous embedded muscle memory was never going to happen overnight.
We believe the setup in the US labour market is highly precarious, and we are one step away from layoffs. Hence, as we said, the odds of a recession are 50%. However, until we see layoffs materialise in claims, Challenger or NFP, it is always possible that Fed rate cuts and now moves by China underpin animal spirits and authorities punt the cycle. This isn’t our base case, and we would put the odds at 35%. But this is a highly dynamic situation, and hyper-financialisation is a very potent elixir.
Since the Fed started hiking, we have discussed how, given the difficulty of lowering inflation without tipping over the labour market, the likelihood of a Goldilocks soft-landing was very low, with history suggesting that two-thirds of the time, Fed tightening cycles have been followed by recession.