For the last year, Alfonso Peccatiello has been managing The Macro Compass as its founder and CEO. He estimates that he spends 70% of his time in his native southern Italy, and the rest in the Netherlands, where he once managed $20bn in funds for ING Bank.
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The Macro Compass, which publishes a free financial insights newsletter, uses an asset allocation model that measures the interaction of two factors: the upward or downward movement of economic growth, and the tightening or loosening of global monetary policy. Peccatiello says we are now in “quadrant four” of this model, which is “the moment where nominal growth decelerates aggressively”.
To see what makes this moment of rising inflation different to that of 1980, when inflation grew to over 14% in the US, investors should look at the equilibrium real rate, says Peccatiello. This metric, which is also written as r*, refers to the interest rate at which economic growth can still be achieved. According to Peccatiello, we should be comparing the r* between now and the 1980s, rather than simply looking at which interest rate is higher.
The long-term equilibrium and growth of an economy is determined by three things, Peccatiello says. First, the number of people in employment; second, productivity levels, which can buffer the effect of a shrinking labour force; and third, debt, which causes people to look more at balance sheets than at growth.
Recession by spring
In the last quarter of the 20th century, demographics were strong – baby boomers, America’s largest generational cohort, entered the work force, whereas today, they have mostly left it. As for productivity, technology advances at that time (like the personal computer and the internet) supported growth. Today, they do so marginally. By Peccatiello’s estimates, these days productivity increases by “roughly 1% a year”.
Lastly, in the 1980s and 1990s, debt in both the public and private sectors was “much, much lower than today”. So while interest rates may have been higher, the r* – equilibrium and growth – was much higher at that time than it is today.
Mortgage rates today, for example, aren’t as high as they were in the 1990s. But Peccatiello says they are more prohibitive, given minimum wages are now worth less in real terms. He sees a recession hitting between April and May of this year, based on indicators such as this.
He also expects quantitative tightening, such as rate hikes, to continue into 2023.
The macro solution
“It's not about what we want central bankers to do,” Peccatiello says. "When it comes to investments, it is about [knowing] what they will do so that we can position and manage the portfolio accordingly.”
Given today’s prohibitive market conditions, Peccatiello suggests that investors learn as much as they can about macroeconomic dynamics to maintain a strong portfolio.
“It's not about what we want central bankers to do.When it comes to investments, it is about [knowing] what they will do so that we can position and manage the portfolio accordingly.”
The Macro Compass uses a quantitative, data-driven approach to investing, and has created an educational platform investors can use to study the “leading indicators.”
Peccatiello suggests we should be asking, “Where do we stand in the cycle and how [can we], in a data driven way, approach investments accordingly?”
To learn more about The Macro Compass’s insights and portfolio strategy, and how to subscribe, visit The Macro Compass.
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