Something Will Break - But What?
The Macro Compass
Tue 14 Nov 2023 - 14:00 GMT / 09:00 EST
Summary
Alfonso Peccatiello identified asymmetric trade opportunities for 2024 by analysing the global impact of central banks' aggressive tightening measures. He argued economic vulnerability extends beyond government debt, highlighting the importance of private sector leverage, especially in floating-rate mortgages and corporate debt, in assessing a nation's resilience to tightening policies. Using Sweden as an example, Alf highlighted the vulnerability of an economy facing a significant increase in private sector debt (from 140% to 240% of GDP in two decades) and rising 30-year interest rates, indicating potential economic challenges. He introduced a comprehensive framework to assess vulnerabilities, considering the scale and pace of change in private sector debt, alongside the debt service ratio. Alf identified Sweden, Canada, New Zealand, the UK, and Europe as countries with heightened vulnerabilities. He recommended exploring relative value trades involving countries with diverse vulnerabilities, spanning equities, foreign exchange, and interest rates. Alf advocated a prudent approach to tactical market views.
Topics
Since late 2022 people have been obsessing about what will break in macro
A tightening cycle can either break something in markets (highly leveraged MtM businesses: real estate, pension and insurance, regional banks etc) or the economy causing a recession
We got a glimpse of markets pain with the regional banking crisis and so everybody has been focusing on the US but macro economic fragilities lie elsewhere
The next big macro trade is likely to be outside the US: let’s see where
