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The Macro Compass: Daily Summaries Delivered
by Alfonso Peccatiello (Alf)
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- Oct 8, 20257 min
Run It Cold Now, Run It Hot Later
Hi everyone - this is Alf.I hope you’re having a great day.My macro models have been suggesting a bi-modal framework to approach markets for the near future: Run It Cold Now (growth My Run It Cold Now theory has been increasingly vindicated by labor market data, and markets are often busy trading what’s in front of them rather than looking through a potential reacceleration in 2026.This is why it’s vital to figure out:1. How early/late do we sit within the ‘’Run It Cold Now’’ period;2. How much has the market priced in by now;3. Consequently: is it still worth getting engaged in Run It Cold trades, or shall we look at Run It Hot Later ideas already?As a reminder, my macro models suggest tariffs will act as a fiscal tightening mechanism until year-end.By early 2026, the OBBB fiscal impulse will offset and Trump’s new initiatives alongside lowered Fed Funds and private money creation should propel a Run It Hot Later period.First, some evidence that US labor demand is really weak: extrapolating benchmark revisions from April 2025 onwards, the US has been consistently shedding jobs!To get a broader perspective on the labor market we can rely on unrevised data which incorporates demand and supply for labor: for example, unemployment rate and its important subcomponents.The chart below shows the number of long-term (27+ weeks) unemployed Americans as a percentage of the total labor force. At 1.14%, this number is already as high as in 2002 or summer 2008 – in both cases, a recession was already visibly hitting America:Why is US labor demand so weak?Due to tariffs, the US is going through a slowdown of its primary fiscal impulse: the 2025 primary fiscal deficit sits almost 20 bps below last year and markedly below the 2023 pace.Tariffs are effectively acting as a tax on US companies and consumers:This seems to be confirmed by ‘’the best economist Druckenmiller knows’‘: the internals of the stock market.The chart below shows (in white) the ratio between an index of the 5 largest US payroll processors companies and the equal-weight SPX, plotted against 2-year Treasury yields (in green).If there are no new jobs, the largest payroll processors companies in the US will suffer - and indeed, their stocks are trading very weak.This is an example of how the internals of the stock market suggest the US labor market is very weak, and that the Fed will be soon called to ease more:The US economy is ‘‘running cold’’ now, yet stock markets are roaring and risk sentiment remains very aggressive - why?The private sector money printer is going BRRRR, led by AI.The chart below shows the big-tech announced capex spending as a % of their EBITDA – it’s already over 65% on average, exceeding the AT&T spending of 1998. To keep up this pace next year, companies will have to resort to debt-funded AI capex:AI Capex mechanically adds to US GDP even before we get to talk about the ROI.But the biggest issue with AI Capex is that it doesn’t really add jobs for the median American for now, and hence we are left with two economies: a hot AI-related economy, and a broader labor market struggling under the fiscal tightening induced by tariffs.The stock market is not the economy, and the gigantic AI capex effort coupled with large global fiscal stimulus programs continues to support risk sentiment.Our global real-economy money printing index is very strong.We tracked the YTD pace of inflation-adjusted $ money creation around the world, and this year we have scored an impressive 5.77% increase in real-economy money printing around the world.This comes after 3 weak years led by the gigantic Chinese housing deleveraging, and the YTD pace in 2025 is in line with the ‘’concerted global growth’’ pace of 2017.The global pace and acceleration is quite robust, and its mainly driven by China which has restated its credit engines after 2-3 years of robust housing deleveraging.Despite being crippled by tariffs (e.g. a large tax), US money creation is accelerating led by the AI-related debt-funded capex spending on data centers.And money printing is only set to accelerate going forward.From a fiscal standpoint, we are 100% sure that from early 2026 we will see:- Germany adding to money creation via a large increase in primary spending;- The US OBBB kicking in with its fiscal stimulus offsetting tariffs money destruction;- Korea, Sweden, and many other countries k
- Aug 25, 202518 min
May The Odds Be Ever In Your Favor
Hi everyone - this is Alf. I hope you're having a great day.‘’I compile statistics on my traders. My best trader makes money only 63 percent of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better be sure your losses are as small as they can be, and that your winners are bigger.’’ – Steve Cohen.This is a hard truth to accept for many macro investors: we will be right only about 50-55% of the times.If your win rate is much higher than this, I suggest you extend the sample of trades you are analyzing or assess whether you are not trading macro but rather just selling optionality – short vol/option strategies have win rates as high as 90%+, but they wipe you out completely when you are wrong.In the last 10 years, I scored a 52% long-term win rate on my directional macro trades. Once I realized that and given that the year-end P&L formula can be written as follows:I knew I’d better make sure the size of my losses doesn’t get out of control.This can be achieved in two ways: sizing trades correctly and designing a system that lets your winners run. We are going to talk about my approach to both angles in a second, but first another important remark.To step up the win rate on macro trades from 50% to say 55% over a long period of time, you need to gain some edge over other macro investors.What could that be?- A data-driven approach with superior macro models- The ability to assess the gigantic amount of cross-asset market signals via quantitative tools- A particular edge in a niche market that you have learnt to navigate well over time- Be less stupid than othersMacro models help a lot, but my ‘’don’t be stupid checklist’’ adds value too:Points 1-3 keep my emotions in check and ground me to a more rational assessment of the trade.Points 4-6 are about implementation.A warning: short carry trades (and long options) are expensive to hold over time if nothing happens.A reminder: in very choppy markets, you can get quickly stopped out with linear trades even if your thesis proves to be correct – consider whether the market regime favors linear or option implementations.Don’t be stupid: check whether the trade you are about to add is not just another expression of a trade you already have on – I have seen people blow up as the 10 trades they were running were just…the same trade.But it’s point 7 that sticks out: sizing and risk management define most of your P&L at year-end.Here is how I approach them through a practical example. Say you think that the S&P500 will keep marching higher over the next month: how many SPYs do you buy?You could be in the right or left 50% of that distribution: when you pull the trigger, you don’t know that. And because you don’t know that, you want to standardize your ex-ante sizing.One effective way to standardize the sizing of each tactical trade so that they don’t excessively weigh on your year-end P&L is to do volatility-adjusted sizing: let’s go through the SPY example.You could be in the right or left 50% of that distribution: when you pull the trigger, you don’t know that. And because you don’t know that, you want to standardize your ex-ante sizing.One effective way to standardize the sizing of each tactical trade so that they don’t excessively weigh on your year-end P&L is to do volatility-adjusted sizing: let’s go through the SPY example.Let’s set our stop at 1.5 standard deviations, and our defined time horizon in this example will be 1 month. For the SPY, using a 5-year lookback the typical 1.5x monthly negative sigma event would be a -7.6% decline.You can play around with the lookback period if you want more history and/or assign different weight to more recent periods if you think today’s vol regime is more relevant (grey boxes).If returns are normally distributed, we will be stopped out 6.7% of the times in our defined time horizon. But as returns often follow other distributions, it’s good practice to check the actual empirical probability of being stopped out against the theoretical 6.7% probability (orange boxes).Finally, define what’s the fixed % of AuM you are willing to lose on any given macro trade.A fictitious $1 million trading account willing to lose max $20k per trade which is bullish on SPY with a 1- month horizon would buy 571 SPY shares at $437 and be stopped out at $402 (-7.6% = 1.5x sigma event) hence losing $20k (= 2% of AuM).Congratulations, you just applied volatility-adjusted position sizing!What are the advantages of this appro
- Aug 13, 20255 min
Plumbing Risks Ahead
Hi everyone - this is Alf. I hope you're having a great day.The US economy and markets might face a double negative whammy over the next 2 months: a large reduction of the fiscal impulse and the aggressive rebuild of the Treasury General Account (TGA).A slowdown in real-economy money creation (primary deficits) could result in an economic slowdown, which will coincide with a drainage of bank reserves (TGA buildup) from markets.Our US primary deficit tracker stands at 1.54% of GDP as per last week, already lagging behind the 2024 pace and way behind the 2023 staggering pace.Tariffs came in at almost $30bn in July, and were this pace to continue we’d effectively face an additional $150bn of fiscal drag until the end of the year.That alone means the US primary deficit might shrink by 15% from $1 trillion in 2024 to $850 billion in 2025:As a reminder, primary deficit spending = money being injected in the real economy.Literally, we are talking about money printing.As step 1 the US government spends money (e.g. cuts taxes) which increases the bank account of households which receive an injection of net worth – they pay less taxes, hence their bank accounts are fatter. Bank deposits grow at commercial banks, which as a result see their reserves at the Fed grow too.Step 2 describes the bond issuance pattern: the US government issues bonds to ‘’fund’’ deficits, and banks swap reserves for bonds at auctions.This slide comes from my Monetary Mechanics course, in which I cover all the plumbing topics and variations you can ever imagine – take a look here if interested:So the private sector will receive a smaller injection of wealth from the US government going forward.Money creation will still happen, but at a reduced pace – but how should we think about the TGA rebuild?When the government wants to rebuild its Treasury General Account, it issues bonds but not for the purpose of ‘’financing’’ money creation – rather simply to rebuild its coffers at the Fed (TGA).As you can see from the T-Accounts at page 2, a TGA rebuild ends up with a reduction in bank reserves (steps 2 and 3) and no creation of money for the private sector.TGA rebuilds are not uncommon, but as we sit at $421 billion now and the Treasury targets $850 billion by the end of September, the $400bn+ increase in 8 weeks would be one of the most aggressive TGA rebuilds over the last 10 years:Bank reserves are currently sitting at $3.3 trillion, and given the ongoing QT and large TGA rebuild they could drop below $3 trillion soon. That would be the equivalent of less than 10% of nominal GDP:The last time we experimented with bank reserves below 10% of nominal GDP was in 2018-2019, and this eventually led to pressures in the repo market in September 2019.This excellent speech from Waller encapsulates how the Fed thinks about an adequate level of reserves.A scarce level of bank reserves means US banks would be more reticent to engage in the repo market (lend reserves against Treasury collateral) and more conservative in their risk-taking.As Waller stated in his speech: ‘’I think of ample reserves as the threshold below which banks would need to scramble to find safe, liquid funding, something that would drive up the federal funds rate and money market interest rates across the economy.’’Also, the Fed can’t really do much to slow down the bank reserves destruction from the TGA rebuild.Quantitative Tightening is running at $40bn/month, but $35 billion of QT is linked to mortgage-backed securities (MBS) which the Fed wants to get rid off from its balance sheet.And the Reverse Repo (RRP) facility is only at $80 billion, so there is little left to drain there as an offset to the TGA rebuild.If the Treasury really goes for a such a fast TGA rebuild alongside with the reduced fiscal impulse coming from tariffs, the US economy could face a soft patch right when bank reserves fall towards scarce levels leaving banks more reticent to provide repo funding and to oil the leveraged financial system.This potential plumbing issue alongside the net fiscal drag leaves me defensive on US economic growth prospects for the next 2-3 months at least.This was it for today. Be nimble, and remain hungry for macro.I This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit <a href="https://themacrocompass.substack.com?utm_medium=podcast&
- Jul 15, 20254 min
Policymaking Protest Assets (PPAs)
Amidst all the noise, markets haven’t had time to digest 5 key macro news:1) Elon Musk announces formation of ‘’America Party’’2) Speaker Mike Johnson: "We're gonna have a second reconciliation package in the fall, and a third in the spring of next year..."3) President Trump: ‘’ “Stock markets are now at all-time high -- we’re going to maintain it, believe me.”4) Bessent: We could appoint new Fed chair in January, nominating in October5) OMB Director Vought sends official letter to Powell saying ''Chairman Jerome Powell has grossly mismanaged the Fed''Musk’s America Party might as well cost the Republicans both the Senate and House in the 2026 mid-terms. That’s a big political risk for Trump.The response from the Trump administration is very clear - run the economy hot. More fiscal stimulus with reconciliation bills on the table again, and dovish pressure on the Fed.The interference with the Fed independence is increasing by the day, with clear attempts to find ''cause'' to fire Powell (e.g. ''gross misconduct'' mentioned by Vought).If you run the economy hot with inflation already above target and force a dovish reaction function at the Fed, our asset allocation model moves towards the ''Everything Rally'' Quadrant:Historically, the best asset mix for this scenario is to get rid of USDs and underweight long-end bonds and buy:1) Assets denominated in USD that produce inflation-proof cash flows;2) PPAs: Policymaking Protest AssetsWhy do these assets perform well in such a macro environment?Trump's plan with tariffs, fiscal and lower front-end real rates means that real growth remains ok as the tariff passthrough hits consumer spending, but rounds of fiscal stimulus preserve real purchasing power for consumer and capex for companies. It holds fine.Nominal growth is instead more robust in the 4-5% area as inflation remains sticky due to tariffs and fiscal. And you make sure that real yields remain compressed.Basically: you run it hot.In such an environment, specific stock markets composed of companies with strong pricing power (e.g. tech) fare very well as it happened in 2003-2006 and 2013-2019 ''Run It Hot'' experiments. But the two prior experiments were run with inflation at or below target, no tariffs, no attacks on the Fed independence, and no hostile policymaking against the rest of the world.Today, I believe a mix of such investments and PPAs (Policymaking Protest Assets) would work better.PPAs are assets denominated in USD that represent a release valve against unorthodox policy mix such as forcing real rates too low vis-à-vis the level of nominal GDP, manipulating long-end yields via reducing issuance or encouraging banks to buy (SLR reform), or incentivizing foreign countries to diversify away from USD investments.Gold and metals in general are the longest-standing PPAs, and needless to say Bitcoin is also a valid contender for PPA properties:The questions we should all be asking ourselves are:A) How long the USD am I in my portfolio? (Probably too much)B) Do I have enough assets producing inflation-proof cash flows? (Probably not)C) Do I have enough PPAs in my portfolio? Gold, metals, Bitcoin? (Probably not)If you enjoyed this piece, please share it with a friend you know will enjoy it too.For questions/remarks/grandma pizza recipes, feel free to drop me an email at themacrocompass@gmail.comStay humble in markets,Alf This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit themacrocompass.substack.com
- Jun 18, 20256 min
Null Komma Null
Hi everyone - this is Alf.I hope you're having a great day.Alongside with running my hedge fund, I work as a consultant and external advisor for some of the largest pension funds, asset managers, banks and funds in the world.Arrangements are flexible: from access to my institutional research + daily access to me all the way to monthly or quarterly calls and sitting through your investment committees.If you think I could add value to your firm, simply reach out at:alf@themacrocompass.comPlease state your name, company, and how you think I could help.And now, to today's macro research piece.Let’s start this macro piece with a little game.Below you find two tables representing 3 consecutive prints of core CPI in the US including its subcomponents: core goods and core services (with a separate mention for ‘’supercore’’ CPI).Without using Bloomberg or Google, are you able to tell which 3-month core CPI streak belongs to the pre-pandemic period and which one to today?I wasn’t, and some of the hedge fund PMs I asked the same question ended up making a mistake.In both cases, core CPI MoM prints were averaging 0.15-0.20 which is broadly in line with the annual 2% inflation target and the subcomponents painted a picture of 0% goods inflation with core and super-core responsible for the quite muted inflationary pressures.The answer: section 2 covers the Jun-Aug 2019 period, and section 1 shows Core CPI for Mar-May 2025.I think we should take some time to reflect on this.In early 2019, Powell pivoted dovish with a clear speech highlighting the tightening cycle was over and the Fed was all about accommodating financial conditions.Core inflation averaged 0.2% MoM in summer (higher than today), unemployment rate was 3.7% (lower than today, and stable), and the Fed moved on to cut rates from 2.25% to 1.50% in Q3 2019.Fast forward to today: the last 3 core inflation prints averaged 0.14% MoM with weaker services inflation, unemployment rate is steadily climbing up at 4.24%, and Fed Funds sit 200 bps above summer 2019.The Fed might soon capitulate dovish.Also, amidst this tariff noise it’s helpful to take a step back and remember core goods only represent ~20% of the core CPI basket.The real action lies in services and housing (dis)inflation.The guys at WisdomTree developed a real-time core inflation metric that uses actual housing inflation rather than the lagging shelter CPI metric:Core CPI using real-time shelter inflation (blue) has been around 2% for 18 months already, but the lagging nature of shelter CPI (grey) pushed official core CPI higher limiting the ability for the Fed to cut.The lagged disinflation in housing seems set to continue, which means the official core CPI measure might keep declining based on official shelter inflation dropping (it’s 35-40% of the core CPI basket: it matters).Notice how using real-time shelter inflation works both ways.The red circle highlights the mid-2021 period when the housing market was ultra hot but shelter inflation didn’t yet show up in the official core CPI – which tricked the Fed into mistakenly delaying the hiking cycle.The opposite has happened in 2024, but the last 3 core CPI prints are now decisively dovish.It’s time to follow the Fed very closely to grasp when the dovish turn might come.The title of this piece is ‘’null komma null’’, a German expression which means 0.0 and we can say the excess inflation today compared to pre-pandemic periods is actually null komma null.But there is another ‘’null komma null’’ which is crucial for markets and asset allocation.A close friend, mentor and hedge fund PM recently had a chat with a German pension fund manager and asked him how much additional USD hedging they have done given the correlation break between EURUSD and risk assets.‘’Null komma null’’. Nothing, no additional hedging has been done.Basically, pension funds and insurance companies remain very long (and hurting) the US Dollar:The reason is very simple: FX hedging costs are still high, and pension funds/insurance companies have return targets to meet.Picture this: the standard return requirement for a pension fund is 6.5/7.0%, and if you are in Switzerland or Japan hedging your USDCHF and USDJPY exposure for the next 12 month costs 3.5-4.0%.That’s quite a hefty negative carry to pay, and this deters pension funds managers from hedging.But.In a scenario where:* The Fed turns do
- May 19, 20257 min
On The US Downgrade
Hi everyone - this is Alf.I hope you're having a great day.On Friday, the credit agency Moody’s downgraded the US rating by one notch to Aa1 (equivalent to AA+).By now, you’ve probably read tens of opinion pieces arguing this is the beginning of the end, and that there will be dire consequences for the US Treasury market.In this piece, you’re going to read a more sober and data-driven approach to this downgrade.The first thing to understand is why Moody’s downgraded the US: ‘’ Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest cost’’.The mainstream take here is that this makes sense because the US will never be able to repay its debt and because interest costs have now exceeded $1 trillion per year.Once you understand the monetary system, both these assertions don’t make any sense:Any government doing deficit spending and issuing bonds in its own currency (like the US) is not walking into an abyss of doom – it’s just choosing to stimulate the economy by printing money for the private sector.It doesn’t have to repay anything – if it tries that via budget surpluses it will cause the opposite effect and end up hurting the private sector (via higher taxes).The process of fiscal deficits creating money for the private sector is explained in the T-Account chart.Step 1 is the government blowing a hole in its balance sheet to print money for the private sector (aka deficits), which adds net worth for households and corporates which see their net bank deposits increase. These deposits end up at banks, which in turn also see their assets (reserves) increase.Banks will then swap these reserves for bonds at auctions where the US governments funds its deficits via issuing bonds and primary dealers (banks) plus foreign investors show up to buy bonds – step 2.Ok fine, ‘’US debt levels are too high now’’ is a groundless worry touted by rating agencies and mainstream commentators but surely paying $1+ trillion in interest costs must be a scary proposition?Not really: for every $ the US pays for interest on debt, there is an investor making $ on risk-free interest rates she is collecting by owning Treasury bonds.Repeating this concept is useful to demystify the monetary system: yes, government debt and US interest payments are rising but it’s not like the US needs to ‘’choose’’ between spending on interest and spending money for healthcare – the government balance sheet doesn’t work like ours.The real limitation to uncontrolled deficit spending is inflation and scarcity of resources (2021-2022 prime example) and not some budget constraints typical of a household.Ok, but how does the Fitch downgrade affect investors and market participants?The key point is that US Treasuries are now rated AA+ instead of AAA.US Treasuries are the most widely used form of collateral in the world due to their high rating, liquidity, deep repo market and solid democratic foundations/rule of law.Does the downgrade affect that?Commercial banks are huge buyers of Treasuries: they use them as regulatory liquid assets (HQLA), as collateral and also sometimes as an asset to hedge interest rate risk on their liabilities.The Basel regulatory framework introduced 10 years ago has 0% capital requirements for government bonds rated between AAA and AA- for its standardized approach: the downgrade to AA+ wouldn’t make any difference. Most banks actually choose an internal-rating based (IRB) approach based on internal models and in that case most jurisdictions apply an exception for any investment-grade rated domestic government bond which automatically assigns them a 0% risk weight.Bottom line: for banks this downgrade makes no difference at all.Treasuries are also widely used as collateral in repo transactions: for instance, pension funds and insurance companies lend their unsecured cash parked at a bank against collateral to upgrade the safety of their ‘’cash’’ deposits in a so-called reverse repo transaction.A secured loan with UST as collateral (e.g. reverse repo) is safer than parking cash unsecured at a bank.Does a downgrade affect the collateral status of US Treasuries?The table above shows the Basel committee recommended haircuts for repo transactions.As you can see, bonds rated between AAA and AA- fall in the same bucket (little haircut required).The Moody’s downgrade doesn’t affect the role of US Treasuries in the financial plumbing world: banks still face 0% risk-weights when buying Trea
- Apr 25, 20255 min
How The Whales Could Dump More US Dollars
Hear, hear: the US Dollar is going down. Investors love to attach an ex-post narrative to any price action, and this time the blame was on Trump’s erratic policies, the reduced attractiveness of US assets, and ‘’China dumping’’. Two of these actually make sense (you can easily guess which ones).But there is a much bigger catalyst for the USD to sell-off more: FX hedging flows from proper ‘’whales’’. These whales control $30 trillion (!) in USD-denominated assets, of which 13 trillion in equities and the remaining portion in fixed income instruments. You may know these whales by their common names: GPIF, Norges Fund, CPPIB, APG, SuperAnnuation… Foreign pension funds, insurance companies and asset managers are the true whales that could dump more US Dollars in an attempt to correct their sizeable and secular ‘’under-hedging’’ of USD risk:In this article I will try to explain why these FX hedging flows (sell USD) could be triggered, quantify how big these flows could be, and assess which countries and currencies could represent the bulk of it. The analytical process requires us to identify how big their USD asset pool is (in % of their domestic economy) and how much under-hedged they are. But first – why do foreign whales actually ‘’under-hedge’’ their USD risk exposure?Imagine you are the CPPIB – Canada’s biggest pension fund with $500bn+ in AuM.You have to generate a consistent return of ~6-7% to be able to service your liabilities (future pensions), which means you’ll invest in a portfolio of stocks, bonds, real estate and alternatives. Your liabilities are in CAD (as you’ll pay pensions to Canadians) but your assets can’t only be CAD-denominated because to satisfy your investment needs you’ll need to look into the US stock markets, $- denominated hedge funds, Treasuries etc. But by investing in USD-denominated assets, you are also implicitly getting exposure to USDCAD risk. So – how much USD risk should you hedge? Or namely, how much USDCAD should you sell as a hedge? The study above from Schroeders details the industry-standard approach: the top chart looks at the correlation between USDxxx (e.g. USDCAD) and your investment asset class (e.g. equities). Recently, the USD has ‘’always’’ rallied when stocks sold-off as the world scrambled towards the safety of US assets backed by sound policymaking (= USD smile), and therefore being ‘’under-hedged’’ was great. On top of it, given a currency like CAD (table below) is commodity/risk-on cyclical, during equity sell-offs having an active ‘’long’’ USDCAD exposure through under-hedging worked even better – and so the suggested USDCAD FX hedge ratio for a 60/40 portfolio is 40%.But what happens when the USD does not rally (!) during risk-off environments, exactly as we are witnessing recently?In that case, being under-hedged (= actively long USD) becomes painful as it compounds negatively alongside equities (and perhaps also bonds) losing value.And that’s when these foreign whales would be forced to hedge, and kickstart a substantial USD firesale process.Let’s dig into the data and find out:A) How big these USD selling flows could beB) Which currencies would be involved the most and whyThe full macro research piece is available to the TMC institutional tier subscribers - a subscription costs several thousands of dollars per year.But you don’t have to pay that - if you act now.As we are getting a large influx of institutional demand for The Macro Compass research, we might be soon closing to subscriptions at retail-friendly prices.This is why today I am telling you: go for it today.The first 20 Substack TMC readers who will use the code USD20 for our All-Round tier will get 20% OFF the (already retail-friendly) subscription price.You’ll end up paying only EUR 999/year.That’s only ~19 EUR/week to read my institutional-grade research every week.The offer is valid only for TODAY!Use the link below. Be amongst the 20 who get in: This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit themacrocompass.substack.com
- Mar 31, 20257 min
The Macro Unicorn
Hi everyone - this is Alf. I hope you're having a great day.‘’There are decades where nothing happens; and there are weeks where decades happen’’ – Vladimir Lenin.Markets were sleepwalking into April 2nd before we had a decent sell-off in US stock markets on Friday.But the size of the YTD sell-off (a mere 5%) masks a very interesting pattern happening below the surface.For the first time since the first half of 2008, we are observing a rare macro pattern – almost a unicorn.The S&P 500 and the US Dollar are going down at the same time:The chart at page 1 shows the 3-month rolling returns for the US Dollar Index (DXY) and the S&P 500.Historically, large SPX drawdown (left part of the scatter) tend to see the USD rallying heavily: the most convex USD appreciation (upper side of scatter) tends to coincide with bad equity drawdowns.This also implies that the upper-left quadrant (SPX down a lot, USD up a lot) experiences the most elongated tail of all the quadrants.The ‘’Macro Unicorn’’ bottom-left quadrant with SPX drawdowns happening alongside a weak USD is not very populated. It’s crucial to remember the last Macro Unicorn dot goes back to July 2008.Why was it so hard for the USD to weaken while the S&P 500 was going down?This is because of three reasons:1) After 2008, the Eurodollar system blew up in size and never looked back;2) The US aggressively swallowed global trade surpluses, and in exchange became the epicenter of all global financial flows into Treasuries and US stock markets;3) Policymakers applied growth-friendly disinflationary policies and politicians postured towards defending Pax Americana on the geopolitical frontWith such a combination of factors, the USD tends to appreciate during risk-off events.A portion of the 12+ trillion dollars of USD debt issued by foreign entities has to be refinanced in any given year, and a risk-off environment which threatens to slow down global trade means all foreign entities rush to buy USDs to service their debt.Foreign investors buy Treasuries because the Fed has your back and it will cut rates if financial conditions materially worsen – cross-border buying of US Treasuries strengthens the USD as money flows in the US.The same foreign investors are reluctant to wind down their US equity exposures because Fed cuts will ultimately restore confidence.Net-net, the USD goes up in risk-off events.The only periods when the USD weakened alongside the SPX were 1998, 2002 and H1 2008.These are all periods where US bubbles ended up deflating rapidly: think of the Dot Com bubble burst in 2001 or the US housing market crash of H1 2008 – before it turned into a global financial crisis.These episodes all have one thing in common: a US idiosyncratic crisis.And today, US policymakers seem to be doing all they can to generate one.On the macro front, the US administration is injecting a large amount of uncertainty.The ‘’no-visibility’’ approach from Trump on tariffs brings big unpredictability – and it’s also nearly impossible for US companies to plan capital expenditures and hiring given there is no visibility on tariffs.To that business uncertainty, you need to sum up the leaked White House memo to the Washington Post (here) which aligns with the recent Musk interview highlighting a 25-35% cut to the federal workforce to achieve budget savings close to $1 trillion/year by the end of May.Former Linkedin Chief Economist Guy Berger looks at a variety of high-frequency leading job market indicators, and I respect him as a non-biased non-alarmist economist.He just produced the chart you see below:Quoting him: ‘’The diffusion index of future headcount plans is now worse than it was immediately prior to the election. Additionally, and concerningly, that pessimism about the future is also affecting the present: the diffusion index of recent employment actions is trailing a year earlier by more than pre-election.’’And this is before the Trump administration starts slashing ~800k federal employees.To add to the potential ‘’Macro Unicorn’’ move which stems from a US idiosyncratic crisis, we are witnessing the very first signs of the unwind of the gigantic long US equity position held by foreign investors.As shown by my friend Brent Donnelly, it is very rare to experience a month when the DAX is up while the SPX down – and we just experienced it:If you take a step back, you realize that foreign investors have accumulat
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Frequently Asked Questions
What is Podzilla's The Macro Compass daily summary?
It's a free AI-powered email that summarizes new episodes of The Macro Compass as soon as they're published. You get the key takeaways, notable quotes, and links & mentions — all in a quick read.
How does the The Macro Compass podcast summary work?
When a new episode drops, our AI transcribes and analyzes it, then generates a personalized summary tailored to your interests and profession. It's delivered to your inbox every morning.
Is this an official The Macro Compass product?
No. Podzilla is an independent service that summarizes publicly available podcast content. We're not affiliated with or endorsed by Alfonso Peccatiello (Alf).
Can I get summaries of other podcasts too?
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How often does The Macro Compass release new episodes?
The Macro Compass publishes monthly. Our AI generates a summary within hours of each new episode.
What topics does The Macro Compass cover?
The Macro Compass covers topics including Business, Investing. Our AI identifies the specific themes in each episode and highlights what matters most to you.
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