Charts of the Week

Growing infrastructure investing and government debt, European equity focus, and more

Hey friends! Happy Monday. It’s time for Charts of the Week. We have a lot of ground to cover, from government debt, to European equities, Nvidia’s slowing sales growth and much more.

Debt, Rates and the Fed

Global government debt has rapidly risen over the last quarter century, climbing by $50 trillion since the Great Financial Crisis to $82 trillion.

Part of this rise in debt is related to aggressive infrastructure spending, which has prompted the rise of infrastructure as an asset class. An area where investment opportunities are likely to continue for the next decade in electricity, water, transportation and more.

In the US, aggressive government spending combined with rising rates has led to a significant appreciation in the interest paid on Treasury issuance. Now $1.1 trillion for the 12 months ending in February of 2024.

Deficit spending is the highest percentage of GDP ever been with unemployment this low, begging the question why so much fiscal excess here if the economy is humming along?

Often is the case that the 10-year note rallies after the Fed is done hiking, but is this time different with so much fiscal largess and inflation showing signs of potentially re-accelerating?

Bank of America looks at two key interest scenarios. Rates staying stable and interest on US debt rising to an annualized rate of $1.6 trillion by December or the Fed cutting by 150 bps and the cost of the debt rising, but to $1.2 trillion.

We are looking at something closer to 50-75 bps of cuts, which would likely leave interest payments at around $1.3 to 1.4 trillion for 2024 by December’s end.

The Fed Funds market has been catching up to our projections at MacroVisor, where we said before 2024 started that we expected 2-3 cuts while the market was pricing in 6.

US equities, however, have been rather resilient. Rising rates have not yet had a deleterious impact this year. We look at 4.5% on the 10-year as a key level to watch as we feel if we do push above there on a sustained basis that US equities will feel the heat of rising rates.

Colossus in the Cloud

Amazon AWS and Microsoft Azure are the big players in the cloud space. Combined they make up 55% of total marketshare, or more than half of all of the cloud!

Amazon’s growth has been extraordinary, more than quadrupling the square footage of data centers and office space since 2015.

Nvidia has also become a beneficiary of the cloud, particularly helping to drive AI growth with their GPU technology. Though that sales growth seems set to slow rather dramatically after 2024, with the growth rate dropping from an estimate of 79% this year to just 20% next year and then only 9% in 2026. Will the rich valuation remain intact if growth slows this much?

Europe in Focus

Hedge funds love European equity exposure, adding to significant overweight positioning this year, extending last year’s build.

European stocks also appear to be much cheaper than the US, but you know what they say. Cheap can stay cheap. There needs to be an upside catalyst for real multiple expansion in the Euro zone.

What’s interesting is that we may be starting to see that catalyst, as economic surprises are stronger in Europe than the US. Meaning that investors may start to become more optimistic and price in future growth in the present, causing multiples to expand.

On the other side of the ledger, expectations of CPI rising is increasing in the US and rising at a comparatively slower rate for Europe and the UK.

European stocks have also been long-term underperformers vs the US. Just look at this incredible relative weakness over the last 20 years. Astounding.

What’s interesting, however, is like in the US, nobody wants to short stocks in Europe either. We’re near a decade low of short positioning as we see European stocks rallying to new all-time highs in many countries.

The United Stocks of America

In the US there is similar fear over being short, particularly as it concerns the NASDAQ 100 QQQ ETF.

The VIX is also near all-time lows vs cross-asset volatility, which suggests there’s reasons to look for potential upside in equity index volatility here. I know, I know. Vol catching a bid? Impossible! … It could happen, though.

One area that suggests such an outcome is put-to-call skew, which is starting to make the VIX look quite undervalued.

Meanwhile, equity mutual fund and ETF inflows have been surging on a 21-week basis, suggesting retail are continuing to pile into this record-setting market, where the S&P 500 has made 22 new all-time highs in 2024.

Managed money is also extraordinarily long this market, clocking the second highest reading in about 2.5 years. Suggesting that these participants are long and with leverage.

Since the Great Financial Crisis, tech has been leading the way higher. Are we getting a bit stretched now? Perhaps. There are some signs that earnings growth for what were once the Mag 7 could start to decline this year. We have also seen leadership narrow to the Terrific Two: NVDA and META.

The outperformance of the Mag 7, and mostly the Terrific Two, has also led these same stocks to be 30% of the S&P 500’s weight again. Amplifying the risk for passive investors and mega cap growth concentrated funds should there be any meaningful change in these companies outlooks or overall market trading conditions. Remember, one reason these stocks were hammered so hard in 2022 was their weightings in passive and active funds.

Insiders seem to have got the memo, selling tech stocks at the highest level in three years, even as the market climbs to all-time highs.

We’re also seeing asset managers and leveraged funds lightening up on their US equity positioning here, just as it had reached an extreme.

Meanwhile, financial conditions are easing to levels that are looser than when the Fed first started hiking. Suggesting any cuts from here could be a major policy mistake. But, in the here and now, this is likely to boost ISM Manufacturing, which just broke a streak of declines coming in with a modest expansion today led by growth in new orders.

That “old economy” of manufacturing companies and other late cycle components, such as industrials, materials, metals and mining, energy, aerospace and defense and utilities all look attractive to us, and comparatively speaking they are much cheaper than the overall S&P 500, and particularly Mega Cap tech.

Meanwhile, however, the Russell 2000 has almost 40% of its exposure in components that make no money. These unprofitable companies, largely within the realm of growth, tend to wither when rates rise. Something to be aware of if we do indeed see interest rates push higher here.

Energy Exposure Continues to Look Attractive

The US is leading the world in newly sanctioned oil and gas projects, suggesting that there are plenty of opportunities in energy right now.

In fact, we think that it’s time for the sector to play catch up to how the commodity has been trading, which is why we remain bullish on many of the names mentioned in our Dashboard.

Consumer Check

Gen Z is going to be overtaking the Boomer generation in the US workforce this year, which is a pivotal shift as more older Americans retire early due to booming asset prices. This is one of the reasons that parts of the labor market remain rather tight.

Consumers, however, still don’t have a very rosy outlook about the future. While their attitude about the present situation has improved, their expectations are worse now than they were during the COVID crash, and only marginally better than they were at their lows during 2022 when inflation was raging.

Is China Coming Back?

Ayesha did a great job about what’s going on in China, so I suggest reading her article here. We’re observing signs that suggest in the short to intermediate-term basis there is a positive trend change for the Chinese macro backdrop, which is helping to support upward price revisions in risk assets within the country.

First, we see industrial profits are bottoming out.

Adding to that, secondly we see China’s factory activity is expanding after months of declines. Is this the beginning of a bigger recovery? That much remains to be seen as there remain major structural problems within the country.

Three Markets Worth Watching

Speculators are very, very short the yen, which is one reason we have no interest in exposure here. Crowded trades often reverse, but we need to wait for that reversal to want to add to a potential long yen trade. For now we’re content on the sidelines.

Cocoa prices hit another all-time high of $10,300 today, reinforcing a theme that’s caused the beans to more than quadruple in value over the last four years due to problematic weather, crop disease and rampant speculation by hedge funds in the futures market.

The lack of productive crops has caused cocoa to face an enormous shortage for the third straight year. We’re wondering if it’s time to swap out our gold bars with chocolate bars.

Cocoa also exceeded the price of copper per ton, climbing about 50% during the month of March. An astounding move that is starting to pressure companies like Hershey’s, which are seeing downgrades and concerned commentaries by analysts regarding rising input costs.

Finally, Dr. Copper, is in short supply and now we’re seeing the biggest contango in over two decades. Prices have broken out of a long-term trading range and that has us bullish on the well-run miners in the space.

Thanks for reading this edition of Charts of the Week! If you have any questions or feedback let us know. We’re always happy to hear from you

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