Mixed Macro

When you look back at the macro economy in the past year, it undoubtedly bore the mark of constant interest rate increases, and these have now risen to a relatively high level. At least compared to what we have been used to in recent years. For Norway, and most western countries, the rate hikes started at the very end of 2021, continued into 2022 and further into 2023. The purpose is said to be to bring inflation under control. Funnily enough, this is being done by central banks on both sides of the Atlantic at the same time as public authorities in many of the same countries are proceeding with what one might say is a very expansionary fiscal policy, which of course have the opposite effect against the same goal. However, it may have to be this way for politicians if you are to win elections. Furthermore, it is worth mentioning that there is a significant difference in public spending between the US and Europe. In the US, much of the deficit goes to finance infrastructure- and industrial investments which can be expected to have positive ripple effects for many years to come. In Europe, welfare benefits are financed to a greater extent, which can be expected to further weigh on public finances for several years to come. In addition, the US has a population trend (demography) that is more favorable than the EU. Simply a younger and more growing population. This has been the case for a long time, and there is nothing in 2023 to indicate that this situation will change. This is probably also why investors prefer the USA, something I have written about in several posts, for example this one "A narrow market" in the summer of 2023 and in the recent "Falling supply and growing demand" in December. This will probably be the case until a significant political change occurs. As former EU President Jean-Claude Juncker once so insightfully said about politicians: "We all know what we ought to do, but not how to get re-elected after we've done it".

The rise in interest rates was therefore not new in 2023 but had been going on for quite some time. However, one must distinguish between direction and level. In 2023, the interest rate was still on the rise, and it had also reached a level where the higher cost of capital really began to be felt both for businesses and consumers. For macroeconomists, it was therefore easy and natural to predict that one would see a sharp reduction in people's consumption, a decrease in companies' investments, an increase in unemployment and a decrease in economic activity. Simply a recession. Many expected this to happen in 2023, as a natural consequence of the work to get inflation under control.

It didn't happen. The surprise in 2023 can essentially be said to be the strength of (especially) the American economy, and the steadfastness in the spending of American consumers. Incidentally, this happened at the same time as the inflation figures were ticking down. With inflation seemingly coming under control, the US central bank's rhetoric also began to change towards an indication that the rise in interest rates is over and that a shift to a period of interest rate cuts can be seen on the horizon.

It was particularly in the fourth quarter that this picture began to crystallize, which led to a strong rally in US indexes. The S&P 500 ended 2023 close to record prices, but it is also important to mention that this is the same level we saw at the end of 2021. There have been 2 years with somewhat troubled markets in between.

The above-mentioned macroeconomist was, like many, surprised by the strength of the economy in 2023, and that is probably a good description of the consensus. For the investors, one can perhaps add that the focus towards the turn of the year may have swung too much in the direction of believing that there will be no recession in the economy, that the fall in inflation figures will nevertheless continue, and that the central banks can thus quickly start to lower interest rates.

Just by saying this, one intuitively understands that it sounds unrealistically optimistic. The various macro numbers that tick in every week and month do indeed still show a surprisingly strong US labor market. However, one of the latest inflation figures that came out surprised marginally on the upside and thus broke a bit with the picture that is being painted of steadily falling inflation. Figures for sentiment among both companies and consumers are also at levels that are more often seen on the eve of a recession. In addition, the macroeconomist showed figures that indicated both that the consumers' cash buffer from the Covid-19 stimulus was beginning to be used up, and that there was a "wall" of debt at companies that had to be refinanced at the now significantly higher interest rates. This will give companies a higher ongoing cost of capital, and limit their opportunities for investments, dividends and share buybacks. There is a predictable dynamic in this.

What should one therefore believe about macro development and thus the backdrop for the market in 2024? All in all, it may seem that the pendulum swung a little too far in an optimistic direction last quarter until the turn of the year. The fact that we will get a situation where everything goes well cannot of course be ruled out. At the same time, there is a risk of seeing the economies continue to slow down sharply as a result of falls in both consumption and investment, at the same time that companies try to compensate by raising prices and a continued strong labor market leads to large wage demands. In such a case, it will be possible to have a recession combined with inflation, so-called stagflation. Add still increasing international unrest, to that disrupted logistics, rising shipping costs, accompanying rise in commodity prices and perhaps a dash of trade war, and you have a really bad 2024. None of this is entirely improbable.

The macro year 2024 will probably end up somewhere in between. I would predict the following:

• It is difficult to see an upswing in people's consumption before borrowing costs come down, or real wages rise sharply (which are partly mutually exclusive).

• Investments and business sentiment will continue to fall or remain subdued until growth picks up or capital costs come down.

• The inflation figures may surprise on the upside. From having gone up-up-up and then down-down-down, many are now predicting a further decline. There is good reasoning around this, but it is not unlikely that we will see a bit of down-up-down-up in 2024.

• The interest rate hikes are probably over, but with slightly more erratic inflation data, it may well be that the central banks will keep interest rates more or less unchanged at today's high levels for longer than the market is currently pricing in.

• I will not predict trade wars and international conflicts. Here it can be both better and worse.

All in all, we see a mixed macro picture which may not be said to provide either clear tailwinds or headwinds for investors. That sooner or later we are on the way to a decline in interest rates, however, seems likely. It is just a matter of whether the road ahead will be a little more bumpy than what was perhaps imagined at the end of 2023.

This is not a dark view of the future. I would rather say it’s a sober view. One must not forget that things are generally going very well in the world, and that many opportunities will appear in the market regardless of macro developments.

Disclaimer: After more than 20 years in the brokerage industry I started my own business in 2021. I published the book "Paleo Trading: How to trade like a Hunter-Gatherer” and launched Paleo Capital that manages a hedge fund according to the principles described in the book. I emphasize that nothing written on this blog is to be regarded as personal advice or a concrete call to take positions. Everyone must be responsible for their own decisions and familiarize themselves with the products they use.