Macro Weekly

Hello from New York City!

Twice per week, I will bring you some of the most high-signal facts and insights from FinTwit. No sensationalism. No pushing narratives. No confirmation bias. Global, serious, actionable stuff only.

This effort began at the onset of the COVID-19 recession. My hope is to share my learnings along the way and to help you navigate this financial crisis with confidence.

Just a heads-up, in this first edition, things will unfortunately look grim. However, being objective about how bad the world is right now is not being pessimistic. Au contraire, it’s being proactive and staying ahead of the market when things do turn around.

Stuff for everyone

First thing first, a brutal reality check. US initial jobless claims and nonfarm payrolls came out on Thursday and Friday this week, respectively. Without any exaggeration, this is the worst unemployment statistic I have ever seen of anywhere in the world.

Interestingly, even though these are some of the most important economic indicators, they didn’t move the market much. The market discounts this information as it cares more about how we will recover in the coming months.

As such, there should be no question anymore that we are in a deep recession. The question is how deep. According to Deutsche Bank, GDP loss from peak to trough is worse than the 2008 GFC in all developed countries except Japan.

The financial storm is here. However, it’s not distributed evenly. In the US, sadly, it’s those with the lowest level of education that are experiencing the most damage.

Other than individuals, small and medium businesses are the most worrisome parts of the economic machinery. Even though gargantuan relief packages are being rolled out around the world, there is a real logistic issue of how fast we can get the money to those in need. The average SMB can normally survive only a few weeks without cash flow.

So where do we go from here? The short-term outlook looks grim. In Singapore, where containment efforts have been executed relatively well, the economy is in free fall. As Singapore’s export accounts for over 150% of their GDP, the economic damage is mostly due to the rest of the globalized world shutting down.

In financial markets, companies are pushing the pause button on share buyback programs. This means fewer bids in stock markets. To get a sense of how massive of a problem this might be, look no further than the $5.3 trillions of dollars that have been used by S&P500 companies to buy their own shares over the past decade, instead of investing in growth.

Stuff for experienced investors:

Even some of the most sophisticated investors were confused about a seemingly V-shaped China PMI number earlier this week. Spoiler: China’s recovery is not V-shaped at all. Here’s a great thread to help you understand this.

In other news, you might’ve heard about the 3-way drama between Russia, Saudi, and the US around cutting oil supply. Erik Townsend, one of the earliest macro guys that warned the world about the crisis, laid out an interesting trade setup. While he thinks oil has more downside, as it normally does in a massive deflationary shock, a calendar spread strategy could offer better risk rewards.

While there are lots of debates around oil, long gold might be the single biggest consensus trade right now. As always, whatever view you have, you should look for informed opposing views and try to understand where they come from. There’s a plausible scenario where more forced liquidations are ahead of us from large sovereign funds.