Macro Voices

MacroVoices #376 Tian Yang: When the Recession Becomes Obvious

Thu May 18 2023

Variant Perception CEO Tian Yang discusses indicators for a US recession, focusing on leading data such as building permits and ISM manufacturing. The final missing piece is the initial claims and continuing claims data, which are now signaling stress picking up and confirming a recession.
The market tends to be resilient before the final leg of a recession hits, but Yang expects co-instant data to keep deteriorating from here. The final flush happens when unemployment data deteriorates, making it obvious that it's a recession.
The market bottom checklist suggests that the current market conditions are not yet indicating a clear bottom, and it's important to be cautious on equities. However, there are pockets of value in small caps, international EM equities, and single stock levels that may be worth exploring for longer-term capital cycle alignment.
The real risk in the current market is a potential leg down in earnings due to concerns about revenues, which may be exacerbated by the timing of the Fed's rate cut. A Fed rate cut may not necessarily be good for equities due to the broadly inflationary backdrop and potential credit market tightness feeding into job losses and revenue declines.
The danger of a recession is that cyclical feedback loops have already kicked in before the Fed acts, making it difficult to break them. While a recession may be good for bonds on a cyclical horizon, there are concerns about structurally higher inflation and yields complicating bond performance. Fixed income may not provide as much protection this time around.
Chinese assets and equity have underperformed since January, making it an attractive contrarian setup for a long China versus short US RV trade. Brazil's inflation lead indicators suggest an easing cycle, making long Brazilian bond trades attractive. However, liquidity headwinds are still present for emerging markets.
The speakers are not currently confident in the direction of the dollar and prefer to wait for a US recession before making any big moves. They suggest that shorting leverage loans may be a good way to gain exposure if there is an MPL cycle or evidence of a recession. They highlight software companies' tech leverage loans as particularly vulnerable due to weak governance and lack of assets to recover.
The cyclical headwinds in the market are still ongoing, but there may be an opportunity to get back into the commodity super cycle trip in the second half of the year. Gold has been in an LPPL bubble that may be ending soon, leading to a risk of a big tactical flush due to extreme speculative buying. From a structural and cyclical point of view, gold has made sense as a core allocation since the beginning of the year.
Banks were set up for underperformance this year and the latest sell-off is causing extreme price action, creating interesting relative vol and tail risk trades. Dislocations in credit space are offering higher yields, presenting opportunities to pick up pockets of value.
Institutional investors can now use Variant Perception's indicators while also having the opportunity to directly play with them and backtest them. Programmatic access is available through hiring a programmer to use the API.
Despite the increase in tape action after inventory, there are recession signals and potential for another leg lower before the bottom is reached for the market. The world running out of spare production capacity in 2023 could lead to an energy crisis if demand increases and there is no supply to meet it.
The pain trade for the market is going higher before going lower, with a potential push towards 4300 to wash out shorts and attract new buyers. A widening breath of the market may be necessary for a push towards 4300 or 4400 on S&P, as mega-cap stocks are exhausted. The VIX is not currently seen as important as zero dt options.
The speaker remains bullish in the bigger picture and sees a potential buying opportunity to reposition on the bull side of gold if there is a deep pullback. The Research Roundup for this week includes the transcript for today's interview, Tian Sly Deck, a chartbook discussed in the post-game, and links to interesting articles.