ALTERNATIVE MARKETS UPDATE – MID DECEMBER 2023 & macro and political outlook december 2023 by macro eagle

​The month of November has been quite successful for equities and bonds alike. With the stabilizing macroeconomic landscape, markets have adjusted to the current state with high rates and moderate to high, but decreasing, inflation. In the past month, there were promising signs that no more hikes are necessary to combat inflation. A notable percentage of market participants is even optimistic about rate cuts soon. While US inflation has gone down substantially already in summer, European countries are following and are on their way to similar levels as the US. Unsurprisingly, this led to a more positive view on longer-term rates. This was evident in falling yields for longer-term bonds. US and UK 10-year bonds’ yield decreased by around 10% since October, while German 10-year bonds decreased by almost 25%. Figure 1 summarizes the development of 10-year yields from October in the previously mentioned countries.

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RESEARCH PERSPECTIVE VOL. 217 December 2023 Alternative Markets December 2023 The month of November has been quite successful for equities and bonds alike. With the stabilizing macroeconomic landscape, markets have adjusted to the current state with high rates and moderate to high, but decreasing, inflation. In the past month, there were promising signs that no more hikes are necessary to combat inflation. A notable percentage of market participants is even optimistic about rate cuts soon. While US inflation has gone down substantially already in summer, European countries are following and are on their way to similar levels as the US. Unsurprisingly, this led to a more positive view on longer-term rates. This was evident in falling yields for longer-term bonds. US and UK 10-year bonds’ yield decreased by around 10% since October, while German 10-year bonds decreased by almost 25%. Figure 1 summarizes the development of 10-year yields from October in the previously mentioned countries. Figure 1: Cumulative Growth of 10-Year Bond Yields in the US, UK, and Germany from October 2023 to December 2023, Sources: Stone Mountain Capital Research & Investing, December 2023 Equities on an aggregate scale have been suffering since late summer and decreased steadily until October. In November 2023, the market rebounded strongly with the S&P 500 reaching almost 9%. With these monthly returns, equities regained more than they lost in the three previous months. A significant proportion can be attributed to the latest decision by the Fed, suggesting there may be no more hikes and even cuts can be considered. In addition, critical macroeconomic variables turned out better than expected. This helped in particular small caps, which struggled substantially in this macroeconomic ecosystem. Since the beginning of November, the S&P 500 and the DAX 40 rallied by more than 10%, as shown in Figure 2. The highly successful rally in the German market was caused by a combination of favorable conditions in the US as well as a promising development in the German economy itself. The UK, which has been struggling more than most developed European countries, could not profit from this development, as the FTSE 100 closed slightly negative compared to the beginning of October. The UK remains under more pressure from the macroeconomic situation than most other European countries. While the situation is getting better, it has not reached the same state as its neighbors. Thus, the recession risk in the UK remains elevated and dampens expectations in the stock market. Bonds and equities are discussed in more detail in the December 2023 outlook by Macro Eagle below. Figure 2: Cumulative Growth of the S&P500, FTSE100, and DAX40 from October 2023 to December 2023, Sources: Stone Mountain Capital Research & Investing, December 2023 Following the positive developments of bonds and equities, cryptocurrencies also soared. With the most recent gains, the cryptocurrency market reached a market capitalization of $1.6tn, which is the highest since its gradual decline starting in 2021. The market also profited from the more positive perception of market participants with lower inflation as well as stable and slowly decreasing rates. At the current state, it also seems as if a hard landing can be averted. For most of 2023, Bitcoin (BTC) dominated the market, as the most “stable” asset in the crypto market (excluding stablecoins). Its features of being seen as digital gold and the optimism about the spot Bitcoin ETF were crucial for maintaining that level of dominance. However, other coins typically follow Bitcoin with a slight delay, and it was no exception this time. In terms of market capitalization, BTC is still dominating with a market share higher than 50% with $848bn. Ethereum (ETH) is the only other coin that totals more than $100bn with $285bn. Tether (USDT) is the third largest token with $90bn and is important as a transaction medium for the space as a stablecoin. USD Coin (USDC) fulfills a similar function and accumulates to $30bn. Solana, once heralded as Ethereum killer, took a hard hit in 2021/22 following major stability issues and the general market crash ranks slightly below at $29bn. Polkadot (DOT) is an established protocol that was never as prominently featured, but functions as a transition platform between other blockchains totaling a market capitalization of $8bn. Figure 3 shows the market capitalization of these coins. Figure 3: Market Capitalization of BTC, ETH, USDT, SOL, USDC & DOT from October 2023 to December 2023, Sources: Stone Mountain Capital Research & CoinMarketCap, December 2023 In terms of performance, the asset class does very well in 2023. BTC, for example, is up 157% in 2023 and is trading at $43k at the time of writing. ETH, which recently gained substantially is “only” up around 100%. When looking at data starting in October this year, BTC gained more than 50%, which was largely due to the spot ETF approval hype. ETH gained around 30%, while riskier altcoins tended to gain more, as the crypto markets seem that the current bull cycle is picking up steam with BTC over $40k. Historically, these bull runs yielded enormous returns, as shown in Figure 4. These bull runs have typically been structured by having the Bitcoin Halvening in the middle of their cycle. The next Bitcoin Halvening, which cuts the awarded BTC per validation by half, will take place in April 2024 and tends to be a promising signal for the industry. In addition, in most cycles, it starts with a rally of BTC and the remaining coins start theirs with substantial delay. In November 2023, Solana experienced significant gains. Starting from October 2023, the token gained more than 250%, as shown in Figure 5. These gains can be partially attributed to the general gains of the industry as well as the strong growth in user addresses, while its main competitors, ETH and Binance Coin (BCB), saw slight to moderate decreases in their user base. Figure 4: Price Development During the 4-Year Bitcoin Cycles, Source: Pantera Capital, November 2023 Figure 5: Cumulative Growth of BTC, ETH, SOL & DOT from October 2023 to December 2023, Sources: Stone Mountain Capital Research & CoinMarketCap, December 2023 Macro and Political Outlook December 2023 By Macro Eagle I – November RECAP: A ferocious melt-up across markets (equities, bonds, credit) was driven by (1) a dovish Fed; (2) lower Treasury issuance guidance; (3) healthy technicals; (4) sentiment and positioning shifts; and (5) supportive data, like the surprisingly strong US growth revision. Accordingly, the narrative shifted from “high for longer” negativity in October to “cuts are coming” euphoria in November.  Otherwise, other bombshells included: (1) Wilders/Milei shock victories in Netherlands/Argentina. (2) German government borrowing suspension after shock Constitutional Court ruling. (3) OpenAI CEO Altman fire/re-hire chaos, which is a bit worrying, given the US equity market AI-dependency. (4) Germany’s Signa real estate empire filed for insolvency – another one bites the dust.  Figure 6: Overview of the S&P 500 Return and Macro News in November 2023, Source: Macro Eagle, December 2023 II – November TOP 10: (1) Best cross-asset rally since 2008 - left graph. (2) US Bonds: best month since 1985. (3) Global equities: best month in 3 years. (4) Speed: the MSCI World moved from “oversold” to “overbought” in terms of RSI within 19 days – the fastest since 1997. (5) US manufacturing: worst stretch in two decades, with 13 consecutive ISM down prints. (6) US consumers spent a record $9.8bn online during Black Friday. (7) Japan inflation ex food/energy at +4%, the highest since 1981. (8) A Virgin Atlantic 787 made the world’s first commercial flight powered completely by sustainable aviation fuel from London to New York. (9) Rain and draught dragged global wine production this year to a six-decade low. France overtook Italy as the world’s largest winemaker. (10) Legends: Kissinger died aged 100, Charlie Munger died aged 99. III – December PREVIEW: Don’t relax yet, as next week is massive: (1) inflation data; (2) Fed & Summary of Economic Projections; (3) BOE/ECB; (4)  EU Council on “Ukraine accession” and “Stability and Growth Pact” changes; (5) Option expiries … to name a few.  After that, I wouldn’t switch off until after the BOJ … they do like to move when nobody is expecting it, which is now. Reminder: they did catch the market by surprise last December. And in July. Just saying. Figure 8: Relevant Upcoming Events in December 2023, Source: Macro Eagle, December 2023 IV – A GLANCE into 2024: With 70+ elections and for the first time more than half of the world’s population voting, next year is clearly a “geopolitical” one. But as always, the US election takes centre stage (more below) with most other nations trying to guesstimate the outcome and to pre-position themselves accordingly. The second big event is the EU election (June), where I think we will see a sharp turn to the right, as a reaction to virtue-signalling “green-policy-overperformance” and “immigration-underperformance”. This will mean heightened environmental policy uncertainty and U-turns for industry.  Other early highlights include the Taiwan election (Jan), China’s growth target (Mar) and Japan exiting YCC (Q1), with important consequences for global bond markets. Thematically, for sure AI & productivity, debt issuance and private market performance will make headlines.  Finally, during the summer months the focus will be on the Euro 2024 (football) in Germany, followed by the Olympics in France. Great excuse for my non-Europe based friends to come over “for work”.  As for what could go wrong? A lot (see My BRO below). But as usual, what will hit us hardest are Rumsfeld’s “known unknown” and the “unknown unknown”. So, no point wasting time on guessing. Focus on resilience.  Figure 9: Elections in the US and the World and Sports Events in 2024, Source: Macro Eagle, December 2023 V – Questioning the CONSENSUS: First, let us praise the ability of the market to humble the consensus: in 2023 China didn’t rally (neither did copper); the US didn’t enter a recession; SVB and Credit Suisse were not expected to disappear; US 10y yields up 100bps and NDX up +45% was not supposed to happen; and very few saw the Israel/Hamas War coming. I can go on, but point made.  The current consensus (see table below) is as “goldilocks” as it gets: inflation down/rates down; growth down but positive; and corporate earnings up. BUY! BUT … there are a few inconsistencies: (1) With a tsunami of treasury issuances coming, the market seems to think investors won’t be charging a term premium. Odd. (2) Unemployment is expected to rise by more than 0.5% which in theory triggers the Sahm-rule, i.e. recession. But apparently doesn’t. (3) Inflation is expected to fall towards 2% while consumers see inflation in 1 year at 4%. Somebody must be wrong. (4) Even if inflation falls, real rates will be positive, which should hurt corporate earnings, but these are expected to grow by 5-10%, even though economic growth is slowing … I could go on. Bottom line: statistically you should always be “biased long” the stock market. But differentiation will be a big theme in 2024, so make sure you pick Quality (great business & management) and Liquidity (in case you are wrong). And when vol is cheap, cover the portfolio tails.  Figure 10: Current State of the US, Source: Macro Eagle, December 2023 VI – US ELECTION: US elections are almost designed to upset the consensus. Obama came from nowhere to beat Hillary; Trump surprised even himself; and Biden outflanked Sanders in the primaries. So, if history is any guide, the Trump-Biden rematch is not going to happen.  On the Democrats side, I can see Biden doing an LBJ-1968 (“I shall not seek, and I will not accept, the nomination of my party for another term as your president”). California Gov Gavin Newsom is clearly running a ‘shadow primary’ for that very purpose and donors like Bill Ackman are pretty open about Biden's age (he called on him to step aside as “clearly past his physical and cognitive peak”).  As for the Republicans, Nikki Haley has the momentum (see right chart) and the nascent critical support (Dimon/Koch/Griffin). A strong #2 showing in Iowa and New Hampshire would start the fireworks (reminds me of the Avis advertisement: “We are No2. We try harder.”) So, in my opinion, get ready for Haley vs. Newsom. Figure 11: Current State of US Election Betting Odds, Source: Macro Eagle, December 2023 VII – My BRO (Binocular of Risk and Opportunities): I omitted this chart last time, which didn’t go down well with readers. So here it is again. The graph is pretty self-explanatory (blue: good / middle: no idea / red: bad). Keen to get your thoughts on what I might be missing.  Figure 12: Binocular of Risk and Opportunities, Source: Macro Eagle, December 2023 VIII – PORTFOLIO: Yes, seasonality for December is excellent (bullish), but (1) sentiment  and positioning have shifted a lot already in November; (2) there is a yawning gap opening between financial market expectations and economic reality – see middle graph; and (3) everybody is talking about the great December seasonality, which normaly is a contrarian sign. Luckily, implied volatility is very low (right) graph, allowing you to position “long” equities while covering the downside. As mentioned above, “differentiation” is the name of the game, so No1 task is to dodge the landmines (currently mainly in anything illiquid and leveraged, like Real Estate). Best defence is to spread your bets.  Geographically, I do like Europe/UK (valuation), Japan/Saudi (on geopolitically motivated economic reform and opening) and China (on stabilisation). India is a great story, but not sure they like foreign shareholders.  Figure 13: CNN Fear & Greed Index (Left), Dispersion Between Markets and Economy (Middle), and VIX Index, Source: Macro Eagle, December 2023 I wish you all a great December, MERRY CHRISTMAS, happy NEW YEAR and, as always, may THE MARKET BE WITH YOU in 2024 !!! Bobby   The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Bobby Vedral MacroEagle E : [email protected] M : +447899996595 M: +447899996595   Bobby is a macro-political analyst who runs his own fund MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. In his external functions he was Member of the ECB's FX Consulting Group. Before Goldman Sachs, Bobby worked at Deutsche Bank and UniCredit/HVB.   This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries or for further information around our research and advisory services please contact email: [email protected] under Tel.: +442037228175. 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