SIGNET

Beneath the Surface - Autumn 2024 Deficits, Deficits, Deficits The US economy grew slower than expected during the third quarter of 2024, with GDP rising by an annualised 2.8% (the ‘Advance’ estimate), against the second quarter’s 3% increase. This growth has been driven largely by consumer and federal government spending, specifically defence spending. For comparison, the Euro area GDP growth rate is closer to 0.6% and Japan’s GDP growth rate is closer to -0.8%. While it may appear that the US economy is no longer sensitive to higher interest rates, the impact has been delayed by extraordinary monetary and fiscal stimulus. Read the full report here: https://lnkd.in/dKKtKuj5

Beneath the Surface - Autumn 2024 In Gold We Trust The secular rise of global debt in recent decades has resulted in the necessity to prioritise the refinancing of that debt ahead of new issuance, and by a ratio of 7:1 according to Crossborder Capital. The health and capacity of private balance sheets is paramount, especially when liquidity dries up under tighter monetary conditions. We postulate that gold underlying the ETFs is being transferred from the West’s bullion banks to the East. Read the full report here:   https://lnkd.in/d-mKH_B2

Signet Snapshot - 13 September 2024 Who was buying the dip in August? Retail. This buying will support recent estimates that the US household allocation to equities, as a percentage of total financial assets, is now well above 42%, the highest allocation ever according to the Federal Reserve. These might not be strong – or ‘sticky’ – hands and valuations at the index levels are relatively stretched. Monthly data from the American Association of Individual Investors (AAII) supports a view that retail investors are close to ‘fully’ invested: the AAII asset allocation survey puts equity holdings at 69%, a level that is near the top of the 35-year range (it peaked in Q1, 2000 at 77%).   The household equity allocation has traditionally been positively correlated with consumer sentiment - until 2020. From 2020, we notice a stark change in the relationship between the University of Michigan Consumer Sentiment index and the household equity allocation. The consumer sentiment index recently fell to its lowest reading of the year at 66.4, and it was at 97.2 in the fourth quarter of 2019. This probably speaks volumes about the change in wealth distribution since 2020, and it may hint at the speculative nature of recent flows.   

Signet Snapshot - 20 August 2024 Consumers expect lower inflation. The Federal Reserve Bank of New York runs a monthly national survey of consumer expectations. In the July report, the consumers’ three-year inflation expectations fell by a noticeable 0.6% to 2.3%, hitting a new series low since the survey’s inception in June 2013. The Fed places a lot of emphasis on inflation expectations, and keeping prices anchored, and while the three-year expectations will be driven by expectations of inflation over the next year (‘Short-term’, which is just back to the pre-Covid trend), the Fed will clock the medium-term expectations falling to an all-time low. Interestingly, we can observe some more granular detail below the 2.3% headline number: 27.6% of the survey now expect inflation to fall below 0% three-years ahead (this was 15.8% in July 2021). 15.1% expect 0%-2%, 21.9% expect 2%-4% and 35.4% expect inflation to exceed 4% (this was 48.7% in July 2021).    The survey also showed that household delinquency expectations have increased, with the average perceived probability of missing a minimum debt payment over the next three months increasing by 1% to 13.3%, its highest level since April 2020. Households will resist higher prices and they will expect rate cuts.   

Beneath the Surface – August 2024   Factory of the World?   In July, China released its official Q2, 2024 GDP data. The QoQ statistic grew by only 0.7%, well short of the 5% annualised target, supporting the view of a serious economic slowdown. With structural imbalances, excessive and unproductive debt, a disinflationary trend unfolding, and political friction with the West, what, if anything, might China’s economic policymakers be planning next? What might the impact be for investors? Read the full report here: https://lnkd.in/dWFmP-9x

Signet Snapshot - 1 August 2024 The National Federation of Small Business (NFIB) has conducted its survey of US small businesses since 1973. It is currently structured as a monthly survey, comprising c.30 questions, which is answered, on average, by about 1000 small and independent firms. Small businesses are the lifeblood of the US economy, accounting for about 45% of US economic activity and 66% of net new jobs. As drivers of innovation and competitiveness, they are often a useful barometer of the true state of the economy.        The latest Small Business Optimism Index reading rose to 91.5, the highest reading of 2024 so far. Expectations for the economy to improve are up, along with the earnings trend. Conversely, current job openings have deteriorated. Inflation is still the leading concern, with 21% of owners identifying it as their single most important business issue. This is the 30th consecutive month below the 50-year average of 98. However, the index comprises ten components and it is worth noting that it’s the five ‘soft’ aspects (expectations and outlooks) that have largely dragged the index down since 2020. On the other hand, the five ‘hard’ aspects (earnings and plans) have held up reasonably well. 

Signet Snapshot - 11 July 2024 Very few advisors are talking about the ‘R’ word. While unemployment is a lagging economic indicator, some of the employment data is now flagging up red. US full time employment growth has just turned negative at -1.2% (YoY). The status of US temporary work, often the first to be cut over concerns of economic weakness, continues to deteriorate at -7.7% (YoY).    The Sahm and McKelvey ‘rules’ are recession indicators, both linked to US unemployment data. They are popular because they have historically thrown out fewer false signals of recession. Both indicators are now highlighting weakness. Formal US unemployment (U-3) rose to 4.1% in June, up from 3.4% in April 2023. This measure, when compared to its 36-month moving average, generates a useful indicator – as seen in the chart below. We are invested but invested cautiously. Remember that since 1990, the average number of months between the last Fed hike and the NBER’s eventual mark of recession is 14. We are now at 12 months. Contact us if you’d like to know how we translate these observations into tactical asset allocation and investment recommendations. 

A new addition to Team Signet, meet Mihai Ghiorghies, Investment Director based in London. Mihai joins us from Crossbridge Capital, where he served as a Director on the Investment Team overseeing advisory and discretionary private client mandates. His responsibilities included client asset allocation, portfolio management, and conducting investment product research. Additionally, he managed the firm’s structured product platform. Prior, Mihai gained valuable and relevant experience at Morgan Stanley and Credit Suisse. He holds an MBA from INSEAD, having studied in France and Singapore. Philip Stangl, Group CIO of Signet, commented: “We are delighted to welcome Mihai on board and look forward to having our clients benefit from Mihai’s investment experience spanning more than 15 years in the industry” Find out more about Signet and how we partner with our clients around the world here: https://lnkd.in/dN5uWFg7

Beneath the Surface – July 2024   Angell’s Paradox   Sir Normal Angell, writing in The Great Illusion (1909), believed that wealth in a modern world would be founded upon credit and commercial contract. If these contracts are abused, it is ultimately the abuser’s debt-based status quo that is jeopardised. It became known as Angell’s paradox. As predicted by the paradox, we are now witnessing a re-energised interest for EM economic partnerships, based around the BRICS organisation. Read the full report here: https://lnkd.in/dURu-A3D  

Signet Snapshot - 19 June 2024 US consumer confidence is elevated when it’s expressed as an allocation to riskier investments. Perhaps it is complacency. US Households’ (and non-profit organisations) allocation to directly and indirectly held equities – as a percentage of their total financial assets – just reached an all-time high of 41.6%. To put this into context, this statistic reached 33.1% in 2007 and 38.4% in the year 2000.   Another survey run by the American Association of Individual Investors (AAII), and covering allocations to just equities, bonds and cash, places investors’ allocation to equities at 70.4%, which is near the all-time highs. The paper value of equities and real estate has resulted in a surge of the net worth of US households, which currently stands at 7.8x their disposable income against an average of 5.7x. The Wealth Effect has been used as a transmission mechanism for the real economy. The Fed utilised "strong and creative” measures to support asset prices in order to drive confidence and demand. But how much substance supports the current valuations and total net worth? What’s the probability of a ‘Wile E. Coyote’ moment? Please enquire…….