CPT_WR_2024_03_27pdf
CPT_WR_2024_03_27pdf
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  1. CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’Bottom Line: On a 6–12-month horizon, two headwinds and one tailwind sum to a mildly underweight allocation to stocks versus cash, and a mildly overweight allocation to bonds versus cash.March 27, 2024Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.In this Issue02How The US Economy Inverted04Why The US Economy Inverted05 US Labour Demand Is Already In Recession, But GDP May Dodge The Bullet07 NVDA Is At A Consolidation Point09Fractal Trades106-12 Month Recommendations11Structural And Thematic RecommendationsEditorial BoardDhaval JoshiChief StrategistHadi ElzeinResearch AssociateIrene TunkelChief US Equity StrategistListen to a short summary of this reportExecutive Summary1601401201001975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030160140120100US LABOUR DEMAND AND SUPPLYMns.Mns.LABOUR SUPPLY IS THE LABOUR FORCE, LABOUR DEMAND IS JOBS PLUS JOB OPENINGS PLUS UNEMPLOYED ON FURLOUGH.•The US economy is highly unusually ‘inverted’. The constraint on the economy is not labour demand, it is labour supply.•Hence, the US economy has highly unusually entered a labour demand reces-sion without entering a GDP recession.•Nevertheless, for the stock market, a labour demand recession implies a prof-its headwind, because it is only when profits come under pressure that labour demand goes into recession. •Against this, wage disinflation would allow long-duration bond yields to fall, which would provide a countervailing valuation tailwind.•A separate and independent headwind is the euphoric pricing of anything AI-related. •On a 6–12-month horizon, two headwinds and one tailwind sum to a mildly underweight allocation to stocks versus cash, and a mildly overweight alloca-tion to bonds versus cash. •For those who can time this, go underweight stocks when the ‘Joshi rule’ is triggered. Or when the rally reaches a collapsed complexity that presages an imminent reversal.•NVDA is at a consolidation point.Inverted: For The First Time In At Least 50 Years, US Labour Supply Is Well Below Labour Demand2024Labour demandLabour supply
  2. 02Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024The Big Story: The US Economy Is ‘Inverted’The pandemic might seem like a distant memory, but for the US economy the pandemic’s legacy is still the big story. For the first time in at least fifty years, US labour supply is running well below labour demand. The big story is that the US econ-omy is ‘inverted’ (Chart 1).Therefore, we must analyse the post-pan-demic inverted economy very differently to the pre-pandemic economy. Normally, labour demand – being less than labour supply – is the constraint on economic output and thereby drives the cycle. But in an inverted economy, labour supply – being less than labour demand – is the constraint on output and thereby drives the cycle. How The US Economy InvertedBefore the pandemic, all downswings caused labour demand to fall well below labour supply. In the subsequent upswings, labour demand gradually caught up with supply...until the next downswing caused a fresh slump in labour demand. And the cycle repeated. Importantly though, all pre-pandemic cycles were driven by the demand side.Then came the pandemic, and the long-standing pattern inverted. Labour supplysuffered the more protracted slump, from which it has gradually caught up with labour demand. Meaning that in the last CHART 1Inverted: For The First Time In At Least 50 Years, US Labour Supply Is Well Below Labour Demand1601401201001975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030160140120100US LABOUR DEMAND AND SUPPLYMns.Mns.LABOUR SUPPLY IS THE LABOUR FORCE, LABOUR DEMAND IS JOBS PLUS JOB OPENINGS PLUS UNEMPLOYED ON FURLOUGH.2024For the first time in at least fifty years, US labour supply is running well below labour demand.Labour demandLabour supply
  3. 03Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024couple of years, the cycle is being driven not by what is happening to labour demand, but by what is happening to labour supply (Chart 2).Interest rate hikes work by choking demand, which is exactly what has happened recently. US labour demand is tipping into recession. Jobs plus job openings today are less than they were a year ago. Whenever this happened pre-pandemic, the economy tipped into recession too. But for the first time in at least fifty years, the economy is entering a labour demand recession without entering a GDP recession (Chart 3).543210202220232024543210LABOUR SUPPLY GROWTHLABOUR DEMAND GROWTHREAL PCE GROWTHAnn%ChgAnn%ChgLABOUR SUPPLY IS THE LABOUR FORCE, LABOUR DEMAND IS JOBS PLUS JOB OPENINGS PLUS UNEMPLOYED ON FURLOUGH.CHART 2Inverted: US Economic Growth Is Being Driven By Labour Supply, Not By Labour Demand2024This is because in an inverted economy the constraint on the economy is not labour demand, it is labour supply. Despite weak-ing labour demand, labour supply has played catch up to demand and thereby driven economic growth. As labour supply has caught up with labour demand, it has narrowed the gap between demand and supply. This has created the perfect macro backdrop of robust economic growth with wage disinflation, a Goldilocks setup for financial assets. The pressing question for the coming 6-12 months is, what happens next to labour supply, labour demand, and their interplay?US growth is being driven not by what is happening to labour demand, but by what is happening to labour supply.Labour demandLabour supplyConsumption
  4. 04Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 202410 8 6 4 2 0-2-4-61975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 203010 8 6 4 2 0-2-4-6US:LABOUR DEMAND GROWTHREAL GDP GROWTHAnn%ChgAnn%ChgSHADED AREAS DENOTE NBER DEFINED RECESSIONS.CHART 3For The First Time In At Least 50 Years, The US Has Entered A Labour Demand Recession Without Entering A GDP Recession2024Why The US Economy InvertedBut first, let’s tackle the obvious question. Why is US labour supply running well below labour demand? There are two reasons: after the pandemic, prime aged (25-54) workers left the labour force; and older aged (55+) workers retired early, generating millions of so-called ‘excess retirements.’ The economically inactive make no contri-bution to labour supply. Yet they still consume the goods and services that gener-ate labour demand. This they do by using savings or, in the case of early retirees, by tapping into their retirement assets and income early. Thereby, the plunge in prime-aged labour participation combined with excess retirements caused labour supply to fall well below labour demand. Subsequently, the plunge in prime-aged labour participation has fully reversed, causing labour supply to recover strongly. But the excess retirements have not reversed and are unlikely to reverse (Chart 4).This means that the strong recovery in labour supply is now exhausted, with labour supply still several million people below labour demand. The economy is still inverted.For the first time in at least fifty years, the US economy is entering a labour demand recession without entering a GDP recession.Labour demandGDP
  5. 05Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024 .5 0 -.5-1.0-1.5-2.0-2.5-3.0201920202021202220232024 .5 0 -.5-1.0-1.5-2.0-2.5-3.0US LABOUR FORCE PARTICIPATION RATES BY AGE COHORT (REBASED TO 0 AT FEB 2020)% %CHART 4Excess Retirements Have Left A Shortfall In US Labour Supply2024US Labour Demand Is Already In Recession, But GDP May Dodge The BulletTo repeat, US labour demand has already tipped into recession. But in the inverted economy – where labour supply is the constraint on output – labour supply is driving the GDP cycle. It follows that a GDP recession would require one of two things: Labour supply must outright contract. However, with the recent surge in illegal migration – most of which does eventually get counted in the survey-calculated labour supply – a sustained contraction in labour supply seems unlikely. Of course, this could change under a new Trump administration. Or labour demand must contract so sharply – by about 3.5 million jobs – that the econ-omy would ‘un-invert’. Once un-inverted, contracting labour demand would once again drive GDP into recession, as in all pre-pandemic cycles.But if labour demand contracts more gently – as now – then the US economy could experience a sustained labour demand recession without a GDP recession, making it difficult for the National Bureau of Economic Research (NBER) to designate it an official recession.This ‘halfway house’ in which GDP is not in recession, but labour demand is in reces-sion and gently ‘catching down’ with labour supply is a distinct possibility – because it is the least painful way for the Federal Reserve The strong recovery in labour participation is now exhausted.All25-5455+
  6. 06Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024to steer wage inflation back down to the 3 percent rate that is needed for price infla-tion to stabilise at 2 percent (Chart 5 and Chart 6).Yet though the economy could dodge the ‘NBER official recession’ bullet, a labour demand recession combined with stagnant per capita real incomes would very much feel like a recession.For the stock market, a labour demand recession implies lower profits because it is only when profits come under pressure that labour demand goes into recession. Against this, wage disinflation would allow long-du-ration bond yields to fall, which would provide some countervailing support to 1721701681661641621602021 2022 2023 2024 2025172170168166164162160US LABOUR DEMAND AND SUPPLYMns.Mns.LABOUR SUPPLY IS THE LABOUR FORCE, LABOUR DEMAND IS JOBSPLUS JOB OPENINGS PLUS UNEMPLOYED ON FURLOUGH.1721701681661641621602021 2022 2023 2024 2025172170168166164162160US LABOUR DEMAND AND SUPPLYMns.Mns.LABOUR SUPPLY IS THE LABOUR FORCE, LABOUR DEMAND IS JOBSPLUS JOB OPENINGS PLUS UNEMPLOYED ON FURLOUGH.CHART 5Goldilocks Needs US Labour Supply To Catch Up With Labour Demand...CHART 6...More Likely, US Labour Demand Must Now Catch Down With Labour Supply20242024stock valuations. In combination this would imply the stock market was rangebound while high-quality bonds rallied.But there is another factor to consider. The euphoric pricing of anything AI-related is a separate and independent risk to the stock market. Absent this risk the macro back-drop would imply a neutral allocation to stocks versus cash. But this additional risk ratchets down my 6-12-month allocation to mildly underweight. For those who can time this, go under-weight stocks when the ‘Joshi rule’ is trig-gered (Chart 7). Or, when the rally reaches a collapsed complexity that presages an imminent reversal.US labour demand will likely ‘catch down’ with labour supply.DemandSupplyDemandSupply
  7. 07Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024NVDA Is At A Consolidation PointIf there is one stock that is the market, it is of course NVDA. Therefore, it is signifi-cant that the extreme trending of NVDA’s 130-day price move has reached the collapsed complexity that reliably presaged previous setbacks and consolidations in 2020, 2021 and 2023 (Chart 8).Given NVDA’s outsized impact on the market, this supports a neutral tactical allocation to stocks, awaiting confirmatory signals from the collapsed complexities of other major investments and indexes to go tactically underweight..22.20.18.16.14.12.10.08.06.04.02202220232024.22.20.18.16.14.12.10.08.06.04.02US UNEMPLOYMENT RATE OF 'JOB LOSERS NOT ON TEMPORARY LAYOFF':3M AVERAGE MINUS 12M MINIMUM OF THE 3M AVERAGE% %CHART 7The Joshi Rule Confirms That US Labour Demand Is Fragile2024On this note, we are delighted to announce that from next week we will be showing the complexities of all the world’s major invest-ments and indexes (including NVDA) on our webpage, with daily updates. Watch this space.The Joshi rule confirms that US labour demand is fragile.Event horizon
  8. 08Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 20248307306305304303302301302019202020212022202320248307306305304303302301303.503.002.502.001.501.223.503.002.502.001.501.22NVIDIANVIDIA 130-DAY FRACTAL DIMENSION (COMPLEXITY)CHART 8NVDA Is At A Consolidation Point2024Dhaval JoshiChief Strategistdhaval@bcaresearch.comWhen complexity collapses, there is a 2 in 3 chance of a trend reversalCollapsingcomplexityThe extreme trending of NVDA’s 130-day price move has reached the collapsed complexity that presaged previous setbacks and consolidations in 2020, 2021 and 2023.
  9. 09Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024HISTORYWINSLOSSESTRADESWIN RATIOWORSTDRAWDOWNRETURN6-Month5.1-6.71643%-10.6%-3.0%1-Year13.1-12.73351%-10.6%0.8%Since Inception(2015)155.4-107.631759%-11.1%157.8%1. THE SUMMARY HISTORY TREATS ALL "WINS" EQUALLY AND ALL "LOSSES" EQUALLY, AND ASSUMES POSITION SIZING IN WHICH FULL WINS GENERATE 2 PERCENT, AND FULL LOSSES GENERATE -2 PERCENT.2.WINS AND LOSSES INCLUDE PARTIAL WINS AND LOSSES SO WILL NOT SUM TO TOTAL TRADES.Fractal Trading System (With Open Trades Highlighted)TRADES INITIATED IN THE PAST 12 MONTHSINITIATION DATEPROFIT TARGET /STOP-LOSS (%)HIGH WATERMARK (%)PROPORTION OF PROFIT TARGET ACHIEVEDCOMMENTSLong MSCI Portugal Vs. Europe13-Mar-249.01.3-0.26EXPIRES ON 13/06/2024Short USD/CLP13-Mar-245.0None-0.90EXPIRES ON 27/04/2024Long France (CAC 40) Vs. Japan (TOPIX)28-Feb-247.53.70.00EXPIRES ON 28/05/2024Short Cocoa14-Feb-2435.07.6-0.99EXPIRES ON 14/05/2024Long Gaming (BJK) Vs. Cybersecurity (CIBR) ETF7-Feb-2410.05.40.12EXPIRES ON 07/05/2024Short Semiconductors (SOXX)31-Jan-2410.0None-1CLOSED ON 29/02/2024Short Gold17-Jan-245.02.3-0.36CLOSED ON 02/03/2024Long USD/CHF10-Jan-245.05.01CLOSED ON 21/03/2024Long MSCI Switzerland Vs. World13-Dec-236.52.6-0.82EXPIRES ON 13/06/2024Long Biotech & Genome ETF (PBE) Vs. S&P 5006-Dec-2310.06.4-0.61EXPIRES ON 06/06/2024Short Cocoa15-Nov-2325.03.8-1CLOSED ON 08/02/2024Long PBJ Vs. S&P 5001-Nov-238.00.9-0.54EXPIRES ON 01/05/2024Long IDR/USD1-Nov-233.53.51CLOSED ON 29/11/2023Long CLP/USD18-Oct-236.06.01CLOSED ON02/11/2023Long iShares 20+ Year T-Bond ETF (TLT)12-Oct-23PRICE 93.28.31CLOSED ON 05/12/2023Long Tin Vs. Aluminum4-Oct-2310.010.01CLOSED ON 17/10/2023Short European Oil Vs. Market20-Sep-236.56.51CLOSED ON 06/12/2023Long USD/MXN6-Sep-236.05.40.53CLOSED ON 18/10/2023Short CAT Vs. MSCI AC World9-Aug-2310.010.01CLOSED ON 01/11/2023Long J&J Vs. S&P 50012-Jul-2310.010.01CLOSED ON 11/08/2023Long French Luxury Goods Vs. US Tech5-Jul-2310.09.2-1CLOSED ON 05/09/2023Long USD/COP5-Jul-236.02.20.00CLOSED ON 05/10/2023Short Japan Vs. World28-Jun-233.53.51CLOSED ON 11/07/2023Short PLN/NOK14-Jun-235.05.01CLOSED ON 27/09/2023Short MSCI Netherlands Vs. Finland7-Jun-237.50.4-1CLOSED ON 14/07/2023Long ZAR/EUR31-May-237.57.51CLOSED ON 25/07/2023Short MSCI Spain Vs. MSCI UK24-May-234.00.2-1CLOSED ON 28/06/2023Long Wheat Vs. Cocoa10-May-2325.022.2-1CLOSED ON 10/11/2023Long CAD/CHF3-May-237.04.60.20CLOSED ON 18/10/2023Short Gold26-Apr-237.54.50.23CLOSED ON 26/07/2023Short NVIDIA Vs. S&P 50012-Apr-2330.03.6-1CLOSED ON 25/05/2023Long USD/CZK5-Apr-235.05.01CLOSED ON 06/09/2023
  10. 10Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 20246-12 MonthCommentsGlobal Asset AllocationEquitiesFixed IncomeCashGlobal Equities (Region)*USEurope ex-UKUKCanadaAustraliaJapanEMGlobal Equities (Sectors)*Communication ServicesConsumer DiscretionaryConsumer StaplesEnergyFinancialsHealth Care Industrials Information TechnologyMaterialsReal EstateUtilities Global Fixed Income**GovernmentInvestment GradeHigh YieldDurationInflation ProtectionCurrencies***USDEURGBPCHFJPYCADAUDEM CurrenciesCryptocurrenciesCommodities (vs USD)EnergyBase/Bulk MetalsGold6-12 Month RecommendationsLEGEND:1 –STRONG UNDERWEIGHT2 –UNDERWEIGHT3 –NEUTRAL4 –OVERWEIGHT5 –STRONG OVERWEIGHT* RELATIVE TO MSCI ACWI (CURRENCY UNHEDGED).** RELATIVE TO BLOOMBERG GLOBAL AGGREGATE (CURRENCY-HEDGED).*** IN TRADE-WEIGHTED TERMS.-0+-0+-0+-0+-0+-0+
  11. 11Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024Structural And Thematic RecommendationsASSET ALLOCATIONINITIATION/MODIFICATION DATERETURN (%)COMMENTSLong Healthcare And US T-Bond (40:60) Combination13-Mar-1484.3EQUITY ALLOCATIONINITIATION/MODIFICATION DATERETURN (%)COMMENTSLong CAC 40 Versus Eurostoxx 5030-Aug-23-5.3Long French Luxury Goods Versus US Technology30-Aug-23-15.8Long Stoxx Europe 600 Versus S&P 50001-Feb-23-10.7Long US Biotech Versus Tech24-Feb-22-32.3Long Interactive Entertainment16-Dec-21-11.8Long MSCI DM Vs. EM22-Oct-2050.0Long French Luxury Goods6-Dec-18187.0Long Animal Healthcare Basket10-Aug-1773.7Long Euro Area Personal Products And Cosmetics22-Dec-11369.2Long Healthcare Versus Market14-Apr-1147.1BONDS, RATES, CURRENCY AND OTHER ALLOCATIONINITIATION/MODIFICATION DATERETURN (%)COMMENTSLong SOL, ETH, MATIC, ADA, AVAX26-Jul-23254.6Long US Dollar (DXY)18-Nov-219.1Long China 30-Year Govt. Bond23-Sep-2124.1Long 50:50 Portfolio Of Ethereum And Bitcoin08-Apr-2144.1Long 50:50 Platinum And Silver Vs. Gold08-Apr-21-32.1Long 30-Year T-Bond+Bono/Short 30-Year Bund+OAT24-Oct-1933.2Long 10-Year IT BTPS/Short 10-Year SP Bonos20-Dec-1811.2
  12. 12Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.CounterpointStrategy ReportThe Big Story: The US Economy Is ‘Inverted’March 27, 2024Indicators To Watch - Bond Yields 4 3 2 1 0-12015 2016 2017 2018 2019 2020 2021 2022 2023 2024 4 3 2 1 0-110-YEAR GOVERNMENT BOND YIELD:USUKSWITZERLANDSWEDENNORWAY% % 4 3 2 1 0-12015 2016 2017 2018 2019 2020 2021 2022 2023 2024 4 3 2 1 0-110-YEAR GOVERNMENT BOND YIELD:USCHINAJAPANKOREA% % 5 4 3 2 1 0-12015 2016 2017 2018 2019 2020 2021 2022 2023 2024 5 4 3 2 1 0-110-YEAR GOVERNMENT BOND YIELD:USCANADAAUSTRALIANEW ZEALAND% % 4 3 2 1 0-12015 2016 2017 2018 2019 2020 2021 2022 2023 2024 4 3 2 1 0-110-YEAR GOVERNMENT BOND YIELD:USGERMANYFRANCEITALYSPAIN% %2024202420242024
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