Callum Thomas

Callum Thomas

Head of Research

Callum is the founder and managing shareholder of Topdown Charts. His career background is in multi-asset investment management in New Zealand and Australia, with a focus on investment strategy and economics.  

Callum has a passion for global economics and asset allocation strategy and has developed strong research and analytical expertise across economies and asset classes.  Callum's approach is to deploy a blend of factors to build out a holistic picture and raise conviction. This includes valuations, monetary conditions, cyclical indicators, sentiment, and technicals.  Callum believes innovation is vital to maintaining an edge through investment research and is on a constant mission to uncover and develop new datasets, indicators, and new ways of looking at the world to drive sensible and profitable decision making by portfolio managers.

LinkedIn: https://www.linkedin.com/in/callum-thomas-4990063/

Twitter: https://twitter.com/Callum_Thomas

The Interplay of Worker Shortages, Aging Populations, and Wage Growth in Inflation Dynamics

TopDownCharts: "Chart of the Week - Bond Yields and Inflation"

Callum Thomas Callum Thomas 27.04.2022 14:34
Treasury Yields and the Long-Term Rate of Inflation: A lot of people have gotten excited about the surge in annual inflation rates, but in my view it’s arguably more interesting to look at the 10-year compound annual growth rate of CPI (long-term inflation rate) — particularly as it pertains to bond yields.       Typically bond yields follow the growth/inflation pulse, with a particular emphasis on growth in the shorter-term. But as we can see in the chart below, bond yields over the longer-term trace a fairly similar path to the longer-term rate of inflation.       Arguably the current move in bond yields has more to do with inflation than growth. Perhaps even to the extent that we could end up seeing growth momentum falter (as the leading indicators suggest), but still see bond yields move higher given the permanent bump to prices and lingering effects on the longer-term rate of inflation.       In terms of the “so what?“ — if we were to take this chart literally, US 10-year treasury yields would need to rise to around 4.5%+ to line up with the current and expected pace of this longer-term inflation rate…             Key point: With an increasing fixation on inflation bond yields could go higher yet.               NOTE: this post first appeared on our NEW Substack: https://topdowncharts.substack.com/               Best regards,   Callum Thomas   Head of Research and Founder of Topdown Charts           Follow us on:   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
Forex: Could Incoming ECB Decision Support Euro?

Gold Price (XAUUSD) Struggling Through Influence Of Strong Dollar (USD), Fed, Interest Rate, Rising Yields And More

Callum Thomas Callum Thomas 22.04.2022 12:32
A multi-year high in the US Dollar seems to be no problem for the price of gold Rising real yields, typically a bearish macro driver, have not stopped the shiny metal Stock market sentiment is pessimistic and bond flows are downright bearish. Amid a rebound in commodities, gold ETF flows have been robust. Gold prices approach $2,000 once again. After spiking to an all-time high in early March at $2,080, the yellow metal dropped under $1,900, albeit briefly, twice in March. Geopolitical fears tied to Russia’s invasion of Ukraine sparked a buying spree across most commodities, and gold was among those bid. A troy ounce rose more than 10% from its January trough under $1,800. After a reset lower over the latter three weeks in March, another commodity revival brings us back to the psychological $2,000 figure. Rebecca Duthie: ECB Announcements to Possibly Tighten Monetary Policy Strengthens the Euro. EUR/USD, EUR/GBP, AUD/NZD and EUR/CHF All Increased | FXMAG.COM Higher Real Yields What’s unusual about gold’s latest thrust is that it comes amid rising real yields. Typically, gold prices sputter when real rates climb. That long-time market correlation has broken down recently. When assets deviate from norms, attention should be paid. In this case, there might be more to gold’s move since it comes in the face of what should be a bearish macro trend. Commodity Tailwinds Our Global Cross Asset Market Monitor report, which hits client inboxes each Monday morning, reviews our latest thinking on the precious metal. Commodities continue to run hot in 2022 after posting enormous gains last year. Momentum is clearly with the bulls as money exits bonds and sentiment continues to be awful in the equity space. Related Article: (XAGUSD) Price of Silver Vs. U.S Yields, Lumber and Corn Futures Dependent on Demand and Supply | FXMAG.COM Multi-Year Dollar Highs Investors are finding solace in commodities. The old trading adage, “if you drop it on your foot and it hurts, then you want to own it” is en vogue. The theme could be long-lasting, and we expect commodity-related stocks to perform well over the coming 5-10 years. Another intriguing aspect of the recent jump in gold prices is that it comes amid a rising US Dollar. Thus, priced in other currencies, gold’s jolt is even more jarring. Featured Chart: Gold vs. FX Market Breadth Price Levels There has been decent broad-based technical momentum behind the price move, buttressing the bullish argument. Should gold rise above $2,000, all eyes will be on the March peak. A move above $2,080 could lead to a wave of new money stepping in. Speaking of money flows, our weekly report highlights that ETF flows to gold are starting to heat up (albeit Gold Miners seem to have been left behind). The stage could be set up for a near-term advance. This is something to watch as we approach the notoriously shaky May through September period of a mid-term election year. Read next: Unexpectedly Gold Price (XAUUSD) Falls, Canada And Chicago - Weather Makes Wheat Futures Fluctuate. The Price Of Palladium - Industrial Activity Is Taking Strain | FXMAG.COM Bottom Line: Gold prices have been creeping back up as investors seem focused on other commodities and asset classes. While stock market sentiment is in the doldrums and the media fixates on rates, the commodity index is not far off its Q1 high. Gold prices in particular are rallying in the face of what are usually bearish macro trends. Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Chart of the Week - Gold Miners vs Energy Producers - 20.04.2022

Chart of the Week - Gold Miners vs Energy Producers

Callum Thomas Callum Thomas 20.04.2022 22:05
Gold Miners Left Behind: This curious chart shows the total assets under management in US equity sector ETFs focused on energy (i.e. traditional energy: oil/gas/coal) and gold miners. AUM in energy ETFs has gone up more than 5x since the low point: part of this is clearly price-driven as surging energy prices have triggered better stock price performance and improved financial results. But clearly investors have also had a change of heart on the sector after shunning it for some time (particularly with the rise of ESG investing). To be fair, precious metal prices have been a big fat range trade for most of the past 2 years The standout though in this chart is the one that isn’t standing out: gold mining ETF AUM has by contrast been very sleepy. To be fair, precious metal prices have been a big fat range trade for most of the past 2 years, and at the end of the day when it comes to these commodity equity sectors, commodity prices matter.With gold itself on the cusp of a breakout, this chart begins to look very interesting, and we could easily see a stampede into gold miners if gold itself can manage to break through to new highs. Indeed, with the bull market in equities seemingly in its final throes this could end up appealing to the hoard of retail speculators still searching for their golden ticket…         Key point: Gold miners have been left behind. NOTE: this post first appeared on our NEW Substack: https://topdowncharts.substack.com/Best regards, Callum Thomas Head of Research and Founder of Topdown Charts Follow us on: LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

You can't miss it! Why You Should Watch S&P 500 (SPX)? What Is The Fed Meaning Amid Current Circumstances? Charts Of Q2 By Topdown Charts' Callum Thomas

Callum Thomas Callum Thomas 14.04.2022 14:22
Welcome to Q2! What a crazy quarter we just lived through (but then again, that could be an evergreen statement for the 2020's!). In many ways Q1 was an echo of the first months of 2020, where in a short space of time the world changed. The events of Q1 2022 are likely to have long-rippling effects on the global macro backdrop, and play a critical role in the risk/return landscape for asset allocators. So I thought it would be helpful to take a quick progress check on the "12 Charts to Watch in 2022". In the original article I shared what I thought would be the 12 most important charts to watch for multi-asset investors in the year ahead (and beyond). In this article I have updated those 12 charts, and provided some updated comments on the outlook -- given the dramatic shifts seen during the past quarter. [Note: I have included the original comments from back at the start of the year, so you can quickly compare what I'm thinking now vs what I said back then] Also n.b., these charts originally feature in our 2021 End of Year Special Report. 1. Fed Behind The Curve: This chart has perhaps become the most important chart of the current macro moment. Inflation expectations have spiraled to 40-year highs, and are at risky of anchoring at persistently high levels. Meanwhile the Fed has now pivoted resolutely into catch-up mode and is talking up the prospects of an aggressive rate hiking and balance sheet normalization program. How this chart plays out will ripple across nearly every asset class. "Based only on this chart we could make an assertion that the Fed has fallen behind the curve. Against that there is the argument that other factors are important too, and not to mention the point that the Fed basically decided to position itself behind the curve to try and prevent the mistake of tightening too soon. With the composite measure of inflation expectations at 40-year highs it’s fair to suggest that the Fed may have some catching up to do as it kicks off the transition away from easing."   2. Fed Catch-Up Risk: Fed rate-hike lift-off means catch-up risk is in play. Credit has taken a hit from rising bond yields, especially the longer duration pockets of credit. But so far credit spreads have remained contained. And contained they will remain until something breaks, and it will: sooner or later. "Naturally the Fed now faces another risk – i.e. the risk of being dragged into a game of catch-up in the context of a very complacent market that has arguably come to expect permanent easing... “the Fed has my back”. Just remember, the old saying of ‘don’t fight the Fed’ means don’t fight against the tides, and the tides are starting to change."   3. Growth Scare 2022: This was a simple scenario and something to ponder at the start of the year, but with the Ukraine war and ensuing geopolitical shockwaves, and the covid resurgence in China, a growth scare or outright downturn now seems likely. Multiple charts of leading indicators on my desk confirm this suspicion. "But then again, maybe the Fed won’t even get a chance to get a rate hike out the door if the chart below proves anywhere near accurate. This and a few other leading indicators are pointing to a possible growth scare in 2022. Maybe it will be one-and-done for the Fed? Or maybe any such growth scare only serves to extend the economic expansion further by triggering renewed stimulus. Certainly a risk and a key chart to keep on the radar."   4. Corporate Capex: But all is not gloom and doom, capex growth is starting to pickup. There remains a very real prospect of a multi-pronged investment boom given thematics, fiscal rebuild/recovery programs, and longer-term impacts of the pandemic (commodities, logistics, and supply chain resilience efforts). "This chart hints at perhaps one of the most important themes I’ve been talking about over the past year – the prospect of a possible multi-pronged, multi-year investment boom. The chart below highlights the typical cycle leads and lags in terms of capex growth, and with easier funding conditions, booming corporate earnings, and a rebounding economy it’s likely that we see a generalized uplift in capital expenditure. But as I’ve been highlighting in the reports there are a few particular sectors that are likely to see a surge in investment in response to surging prices – for example, the global shipping sector, and commodity producers. Both of which have seen capex languish for the past decade, and both of which have seen an effective windfall from the pandemic (i.e. surging shipping rates and commodity prices)."   5. Capacity Utilization: Indeed, capacity utilization remains tight, especially labor markets. Arguably the black line in this chart is constrained by supply/shortages. Either way, this chart reinforces the inflationary pressures that continue to build in the system. "Another key impetus to resurgent capex is tightening of capacity e.g. measures of labor market capacity utilization are close to pre-pandemic levels. This will put upward pressure on pricing and present an incentive or signal to firms to lift investment. But it also speaks to the inflation theme. While some of the short-term upward pressures on inflation are likely to pass (e.g. backlogs, base effects, the initial bounce-back), should we see further and sustained tightening of capacity utilization it will put upward pressure on the more core or underlying inflation pulse."   6. Government (and Green) Capex: Again, whether its infrastructure, climate, or indeed energy security, governments around the world are embarking on fiscal stimulus programs that span hundreds of billions - and will take multiple years to fully implement. "To really drive it home, the capex/investment theme is not just about corporations responding to economic forces, it’s also about governments responding to the pandemic as well as social/political forces. Specifically in terms of recovery/rebuilding fiscal programs which in many countries have been targeted at infrastructure. But also climate related infrastructure and investment – something that is definitely part of fiscal packages, but also part of shifting investor preferences. We’ve observed a clear trend of rising financial investment into clean energy sectors being followed by uplift in real investment. So altogether it’s quite interesting."   >>> As a reminder, these charts were featured in our 2021 End of Year Special Report. Click through for a free download of that report. 7. US Absolute vs Relative Valuations: One of the consequences of the Fed vs inflation chart has been rising bond yields: bonds are fixated on runaway inflation and the ambitious tightening program espoused by FOMC members. As such, the last pillar of support for equities is being removed. Previously the argument was that the PE ratio is very high but it's ok because interest rates are low. As we see with a squeezing equity risk premium, it's just plain expensive now. At the margin this means a downgrade to the risk/return outlook for equities (especially relative to bonds). "Should all this talk of capex and investment booms come to pass, we’d likely start to see upward pressure on bond yields, and that will put a squeeze on the US equity risk premium. The chart below is one of my favourites for thinking about US equity valuations. It points out what most of us already know: US equities are expensive in absolute terms …i.e. the PE ratio is really very high. But if we factor in low bond yields then maybe it’s not so bad. At present the chart says absolute valuations are wildly expensive, but relative valuations are ok (for now). That will change if/when bond yields rise – and in that sense it also goes to highlight the interest rate sensitivity of the market if we accept the statement that equities only offer reasonable value in a low yield environment."   8. US Asset Class Valuations: But it's not just equities, it's also bonds, housing, and increasingly also commodities. When everything is expensive, maybe we could suggest that in that situation that only cash is cheap! "To complicate matters slightly, my valuation metrics show bonds expensive vs history as well – so: “equities look reasonable vs expensive bonds??”. To make matters worse, property prices are also sailing into rarefied air. Commodities on the other hand, while not cheap, at least look reasonable by comparison and could benefit from increased capex."   9. US vs Global Equity Valuations: But peering into global equities we can certainly find *relative* value. Perhaps most interesting in the latest run of this chart is how developed markets have dropped down to match the valuations of EM equities. Pretty interesting when you consider the differing level of country/governance risk. The other thing to note again of course is that US equities look extremely expensive vs the rest of the world. "Another chart that makes US equities look expensive by comparison is when you look at PE10 (or really just about any other valuation metric) for the US vs the rest of global equities. It is true that Emerging Markets and Developed Markets excluding the US have seen a decent rebound in valuations since the March 2020 lows, but there is a clear and compelling relative value case here."   10. Global Equity Super Sectors: The unique macro backdrop of 2022 and the tech-tumble has contributed on all angles to a big boost in relative performance of what I call the super sectors of "old cyclicals" and "defensives". Cyclicals in this sense got a big boost from commodities, while defensives performed true to label during the tumultuous market conditions so far YTD. I continue to think looking at global equity markets in this lens makes sense. Rotation is here. "The most logical pushback on the previous chart is to note that we could have said something similar for much of the past 5-10 years. So, the question is then what will it take for this gap to close? One avenue for a turn in relative performance of global vs US is the path of the “super sectors”. A big part of US outperforming the rest of the world has been the high hurdle set by tech and tech related companies. Global ex-US has a big skew to “old cyclicals”. In that respect, the most important technical clues to a rotation in performance between US and global will be the chart below. Specifically look for an upturn in the blue line to get a jump on a ‘virtuous turn’ in US vs global relative performance (and value vs growth for that matter, also smalls vs large – it’s a fairly sprawling issue in equities!)."   11. Low Quality Credit – Low Risk Premium: Back on credit and sticking with valuations, the lower end of the credit quality spectrum continues to trade on very tight (expensive) relative valuations. Simply put, credit markets are not prepared for a downturn, and at this point look largely oblivious to the apparent storm clouds on the horizon. "The valuation conundrum is not just the domain of equities – credit also is looking increasingly expensive. The chart that hammers the point home to me is this composite view of where the lower quality credits are trading relative to the higher quality credits. Basically we see a lower and lower risk premium for lower quality credit. By itself this may not be an issue, particularly if the economic and monetary backdrop are supportive of credit conditions. But if credit conditions deteriorate things could turn sharply here – and indeed, we may well even see early clues of any impending stress in this very indicator itself. So very much one to keep checking in on."   12. China Property Downturn: Meanwhile in China the property market downturn remains in full swing, and the covid resurgence likely weighs further. The upside of the downside in the China macro pulse though is the prospect of more forceful easing. And if you are looking for upside risks or reasons for optimism then you'd do well to keep a close eye on this corner of the macro map. "I always say in my many years of covering China macro, if I could only choose one indicator it would be property prices, and perhaps if I were to pick only one chart it might be the one below. My composite leading indicator for Chinese property prices (money supply, interest rates, funding) is pointing to an extension of the current downturn deeper and well into 2022. This is of critical importance in so far as the economic pulse and commodity demand is concerned, but also – for the policy outlook: the lower that black line goes, the greater the probability of monetary stimulus (and you know what that means!)."   Summary and Key Takeaways: -The Fed has pivoted into catch-up mode as inflation expectations risk (/are) running away, expect a string of rate hikes and balance sheet normalization. -The pivot from stimulus to stimulus removal and then tightening poses risks to just about every asset class: particularly in light of the complacency that still is clearly evident. -(but) there are upside risks in the form of a possible multi-pronged capex/real investment boom, and eventual albeit stop-start reopening/normalization. -(but!) there are also clear and pressing downside risks e.g. a likely global growth scare as stimulus gets removed, financial conditions tighten, and price pressure bites. -Geopolitics & Covid resurgence have nearly cemented the slowdown thesis. -A key issue with regards to a growth slowdown and monetary tightening is the reality of multiple major asset classes looking historically expensive (e.g. US equities, property, bonds, and even commodities). -With many assets still richly priced in absolute terms, relative value remains the last bastion, and indeed rotation likely remains a key theme this year. -Other than that, a defensive skew and eye on risk management seem prudent. Overall: Heading deeper into 2022 the risk vs return outlook is clearly and steadily shifting across asset classes, and we’ll need to focus on both short and longer-term indicators to navigate risk as we progress through this strange -- but also somewhat familiar cycle. Thanks for reading! NOTE: this post is an excerpt from my 2021 End of Year Special report - click through to download a free copy of the report.   Best regards Callum Thomas Head of Research and Founder of Topdown Charts Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Chart of the Week - Gold Miners vs Energy Producers - 20.04.2022

Revolution! Monetary Policy - Number Of Rate Hikes This Year Is Shocking!

Callum Thomas Callum Thomas 06.04.2022 08:59
Monetary Policy from Tailwind to Headwind: Last year I counted 123 rate hikes across 41 central banks… meanwhile already so far this year I’ve counted 67 interest rate hikes across 45 central banks, with the majority of central banks globally now well into rate hike mode.       The latest big new arrival to the rate-hike club was of course the Fed, and most expect a fairly aggressive hiking cycle; potentially with QT starting soon. Incrementally this will all present increasing headwinds to global growth and risk assets.       Indeed, the chart below tracks the net-number of central banks in rate cutting vs rate hiking mode. It maps out the clear policy pivot that occurred last year, and which accelerated this year: towards interest rate hikes and stimulus removal.       If we take this chart literally, the global manufacturing PMI looks set to drop below 50 by the end of the year. Not sure how many 2022 outlook pieces had that on their list!                 Key point: The global monetary policy pivot presents clear headwinds to growth.                   NOTE: this post first appeared on our NEW Substack: https://topdowncharts.substack.com/               Best regards,   Callum Thomas   Head of Research and Founder of Topdown Charts           Follow us on:   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
A Look At Markets Around The World: US CPI, Sweden Riksbank EU Yields And More

Weekly Macro Themes - 28 January 2022

Callum Thomas Callum Thomas 28.01.2022 12:52
Here's a brief overview of the topics and charts covered in the latest edition of the Weekly Macro Themes report. I send this report out late Friday NZ time and aim to cover a good mix of macro/ideas/risk topics, across a global macro/multi-asset universe.       This week I covered the following topics/ideas:       1. Stocks vs Bonds: We've developed an interesting set of charts covering relative value, positioning, sentiment, momentum, mean reversion, and leading indicators. We see a major shift in prospects ahead for the stock/bond ratio.       2. Treasuries: A review of all the key indicators (valuations/sentiment/technicals/macro) and lay out how a window appears to be open for now and closing later.       3. Value vs Growth: All the conditions seem to be in place for a major turning point in value vs growth, and this is exactly what we are witnessing globally (so far mostly led by “cyclical value”), check out our fascinating set of charts.       4. Global Banks: Banking sector equities are gaining ground as bond yields tick higher, and technicals line up with a compelling relative valuations starting point.       5. Energy: A review of the outlook for crude oil prices, and as a result the outlook for energy sector equities based on value/sentiment/thematics, as well as a glimpse at the shifting prospects for renewables vs fossils.           Request more information about our institutional research service for your firm, simply fill in the form here. (n.b. the full service is aimed at fund managers and institutional investors)                   About the Weekly Macro Themes report   The "Weekly Macro Themes" is part of our institutional offering aimed at multi-asset and macro-driven portfolio managers and strategists. The report takes a chart-driven macro, fundamental and multi-factor approach; a powerful combination of cross-asset idea generation for portfolio managers, charts on key global macro trends, analysis on portfolio risks, asset allocation research, and innovative indicators, in a format that delivers a balance of brevity and depth so that you can efficiently assimilate the insights.       Also part of the service is the monthly market cycle guidebook, global cross asset market monitor, and quarterly strategy pack.           (or just follow us for now):   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
Chart of the Week - Crude Oil Capex Collapse

Chart of the Week - Crude Oil Capex Collapse

Callum Thomas Callum Thomas 20.01.2022 14:23
Crude Oil Supply Tailwinds: Crude oil has been quietly achieving, and I would say overall the path of least resistance is still higher for crude in the coming months and quarters. One key reason is the substantial supply tailwinds already baked-in.       First it was the commodity crunch of 2014-16 that sunk commodity related capex, and then a second wave of commodity crashes in 2020 (need I remind you of the brief foray into negative prices for WTI crude?!) where the pandemic also caused tremendous and varied disruption to commodity investment.       Add to that steady shifts in investor preferences and social/political attitudes — i.e. the rise of ESG investing and the quest for carbon zero. Basically this has starved the oil & gas sector of funding, and essentially engineered a new bull market in energy.       All that’s left now is for reopening and post-pandemic normalization to drive a more fulsome recovery on the demand side and crude could easily top $100/bbl.       Clearly this is interesting in its own right and with regards to energy sector equities, but is also meaningful for the inflation picture (and potentially also the growth outlook).                 Key point: Crude oil likely sees further upside on the back of major underinvestment.                   NOTE: this post first appeared on our NEW Substack: https://topdowncharts.substack.com/               Best regards,   Callum Thomas   Head of Research and Founder of Topdown Charts           Follow us on:   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
A Look At Markets Around The World: US CPI, Sweden Riksbank EU Yields And More

Taxes, UK Equities, Global Shipping and Pandemic in "Charts of 2021: Honorable Mentions" by Callum Thomas

Callum Thomas Callum Thomas 03.01.2022 14:13
Last week I shared with you some of my Best Charts of 2021 (as well as my Worst Charts of 2021 and then also my favorites!) -- so this week I wanted to follow up with what I would say are the "honorable mention" charts of 2021...       These charts were worthy of mention but didn’t quite fit into any of the previous categories -- but were definitely worth including and highlighting both due to how they proved useful in the past year or so, but also in terms of the outlook into 2022.       These charts were featured in my just-released 2021 End of Year Special Report -- check it out (free download as a holiday treat!).       Enjoy, feel free to share, and be sure to let me know what you think in the comments...           1. Expect Higher Taxes: This chart arguably points to higher tax rates ahead given that government debt as a % of GDP has doubled over the past decade while effectively economy-wide tax-take has gone sideways.       chart of developed economy fiscal outlook - higher taxes forecast           2. Global Food Crisis? Stagnant capex by food producers contributed to a perfect storm for food prices (along with actual storms, pandemic disruption, rising costs).                 3. UK Equities: In the wake of Brexit & pandemic woes, UK equities moved to decade-low valuations vs their European peers. From crisis to opportunity?                     >>> These charts were featured in our 2021 End of Year Special Report.               4. Global Shipping Capex: Shipping sector investment stagnated for a decade – contributing to the global supply chain chaos. Ironically it likely rebounds after banking windfall profits from the surge in freight rates.                 5. Global vs US Earnings Cycles: A key driver of the long-term cycles of relative price performance of global vs US equities has been the cycles in relative earnings. That cycle will need to change for the price cycle to change.                 6. Pandemic Progress: the global rollout of vaccines, rising immunity, societal adaptations, and therapeutics have helped result in a series of lower highs in deaths – I like the look of that trend. The light at the end of the tunnel, though flickering at times, does seem a little brighter now…                     Thanks for reading!           This is an excerpt from my 2021 End of Year Special report - click through to download a free copy of the report.       Best regards       Callum Thomas   Head of Research and Founder of Topdown Charts           Follow us on:   Substack https://topdowncharts.substack.com/   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
Favorite Charts of Callum Thomas of 2021

Favorite Charts of Callum Thomas of 2021

Callum Thomas Callum Thomas 30.12.2021 11:32
    Last week I shared with you some of my Best Charts of 2021 (as well as my Worst Charts of 2021) -- so this week I wanted to follow up with my Favorite Charts of 2021!       The following charts made the list either because they were something completely new or just super interesting (to me at least!) ...or indeed ones that helped illuminate some of the key developments across macro and markets.       These charts were featured in my just-released 2021 End of Year Special Report -- do check it out when you get a chance (free download as a holiday treat!).       n.b. I have updated the charts with the latest data (in a few cases the original idea has actually come entirely full-circle). Also on formatting: the italic text is a quote from the report in which the chart originally appeared.       Hope you enjoy!           1. Inflation Surprise! This was my go-to chart in highlighting the risks presented by inflation (as I figured that with folk’s inflation expectations skewed downwards by a decade of deflationary winds that my upside inflation scenario would be a big surprise).       “Already we’ve seen inflation surprises go from downside surprises to upside surprises across developed economies, and I’d expect that trend to continue.” (15 Jan 2021)                 2. Global Monetary Policy Map: If the first chart in this report didn’t make it obvious enough, this next chart should: central banks are stepping away from stimulus, OK?       “With the lift-off in emerging markets (and the small/developing central banks), the global weighted average policy rate has clearly turned the corner. As such I would double down on the call I made earlier in the year for central banks globally to move to a more neutral stance – and actually, would probably be about time to shift the global policy outlook to hawkish.” (7 May 2021)                 3. Global Oil & Gas Capex: The next chart shows in the blue line the fall and fall of global Oil & Gas capex: a key reason I stuck with the bullish bias for commodities and crude oil in particular… and a key reason to stay that way. As I note, the path to carbon zero will be paved with a commodities bull market as a logical consequence of the shifts in supply and demand, and investment required to make that shift.       “the medium-term outlook for crude oil: I think it’s worth highlighting again the capex picture for crude – global capex (and rig counts) remain near record lows. Clearly the pandemic has taken a toll on the sector. But the road to carbon zero is going to be a long one and the world won’t kick its petroleum habit overnight, and before we know it the world will be vaccinated, open for business, and potentially overstimulated.” (5 Feb 2021)                 >>> These charts were featured in our 2021 End of Year Special Report.               4. EURO STOXX 50 Breakout: This next one makes the favourites list for a few reasons, first is just how text-book a breakout it is, second how significant it is – i.e. with regards to price breaking out from such an entrenched trading range, and how it also helped confirm my biases to expect a breakout in European equities!       “the first shows European equities basically stuck in a range and currently looks to be in the process of making another attempt at breaking out. Given the duration and durability of this trading range, I would say that when/if it does breakout, it will be very significant indeed.” (5 Feb 2021)                 5. Bond Yield Model: This chart was actually introduced later in the year but it basically was designed to present a single image – combining half a dozen different charts and indicators which were pointing to higher bond yields. As it stands, there is still quite the disconnect, and therefore upside risk to bond yields (even if they ‘meet in the middle’).       “Moving onto the macro/market indicators, we still see global consumer discretionaries vs staples + developed market manufacturing PMIs + inflation swaps all in agreement that 10-year treasuries should be (a lot) higher. Thus, risks are clearly skewed to the upside for bond yields.” (22 Jan 2021)                 6. Total Population Growth: The last one in this section is a key element [high and stable population growth vs low and falling growth elsewhere] of the strategic case for the often-forgotten Frontier Market Equities. Most allocators put FM equities in the too hard basket, but I have been advocating the surprisingly intriguing strategic case (in many ways superior to EM equities), but also the tactical case – basically nailed the exceptional run in Frontier Market equities over the past year.       “Frontier Market equities have some interesting strategic characteristics: lower historical volatility vs EM, higher expected returns, relatively lower correlations to DM/US equities, and higher expected population growth. Although it is a relatively unpopular corner of global equities, it has begun to attract some attention as price has picked up.” (5 Feb 2021)                     Thanks for reading!           This is an excerpt from my 2021 End of Year Special report - click through to download a free copy of the report.       Best regards       Callum Thomas   Head of Research and Founder of Topdown Charts           Follow us on:   Substack https://topdowncharts.substack.com/   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
Trend Lines - Well Known, Less Understood

My Best Charts of 2021

Callum Thomas Callum Thomas 22.12.2021 13:28
    As we wind-down for the year (hopefully) -- I thought it would be good to share some of my charts and calls that worked particularly well this year (and don't worry, I will be sharing my worst charts next week... there are always two sides to the coin!!).       These charts were featured in my just-released 2021 End of Year Special Report - do check it out when you get a chance (free download as a holiday treat!).       The charts listed below were particularly helpful in arriving at some of my key calls and recommendations for clients this past year. I often find that while I do tell the story around the charts and build the puzzle up with multiple pieces, in many cases a good chart can speak for itself and actually do most of the heavy lifting in the investment thesis.       It's also a good exercise to go through - to see what worked well. It's fairly conventional wisdom to try and learn from failures, but it's also important to try and learn from success (albeit while being mindful of hubris and the need to stay humble).       With that all said, here they are! Hope you find it interesting...       n.b. I have updated the charts with the latest data (in a few cases the original idea has actually come entirely full-circle). Also on formatting: the italic text is a quote from the report in which the chart originally appeared.           1. Global Monetary Policy Pivot: I was early to this theme, but that’s what this excellent chart is designed to do! (i.e. provide advance warning on shifts in global policy tides).       “already a number of smaller/developing country central banks have moved to hike rates as inflation begins to pickup (5 so far: Mozambique, Tajikistan, Armenia, Zambia, Zimbabwe). I like to keep an eye on the smaller/developing central banks: many have structural weaknesses and tend to be more sensitive to inflation and hence will be the first to move on rates. In other words, while individually unimportant and idiosyncratic, collectively they have information.” (19 Feb 2021)                 2. Inflating Inflation: closely related, a key theme for me this year was the clear upside risks to inflation. It seems obvious at this point given the global monetary policy pivot towards tightening and the constant news flow around inflation, but at the time it was a bit out of consensus and certainly was not without pushback in conversations earlier in the year.       “the prospect of normalization and economic recovery given powerful monetary + fiscal stimulus globally likely skews inflation risk squarely to the upside over the medium-term, and the monetary lead indicator points to upward pricing pressure over the next 12-18 months. The broader bullish commodity outlook also likely lifts price perceptions.” (6 Jan 2021)                 3. Backlogs Biting! the previous chart was more about the sort of fundamental/underlying or medium-term inflation pressures, this next one laid out the short-term pressures stemming from backlogs – another topic that was fairly underappreciated at the time.       “In the short-term there are a few key dynamics which are set to put upward pressure on prices and the headline reported inflation rates. First is the issue of backlogs/global supply chain disruption – by the global PMIs and Google search trends (and anecdotally) it remains an important issue. Historically a rise in backlogs has led to a rise in pricing pressure (we’ve certainly seen it in freight rates, which are up 2-3x).” (15 Jan 2021)                 4. Global Trade Rebound: and of course, picking a resurgence in global trade was a key companion to the previous chart - I’ve said it before and I’ll say it again: there are no backlogs without demand, and there was!       “perhaps the most interesting and stark example of green shoots is the rebound in global trade (funny what happens when you turn the global economy off and then turn it back on again). But a very closely linked theme is that of backlogs/supply chain disruption: this problem has intensified as economic activity picks up vs a still constrained global supply chain (and stuck boats don’t help either)” (2 April 2021)                 5. Asset Class Valuations: throughout this year I advocated staying the course on the core asset allocation view to overweight risk/growth assets and underweight defensive assets – established in March/April 2020. Saying “stay the course” always feels like a boring conclusion, but sometimes asset allocation involves long periods of relative boredom!       “Aside from the big ideas, at the highest level I remain bullish growth vs defensive assets It is true that valuations have rebounded sharply for growth assets, but defensive assets remain extreme expensive Importantly, policy remains easy, earnings/cycle is turning up, and the technicals look good There’s no clear case to get defensive from a big picture medium term standpoint yet, but obviously we’ll keep monitoring the key sign posts for clues as the cycle progresses” (6 Jan 2021)                 >> These charts were featured in our 2021 End of Year Special Report.           6. Asset Allocation -- the Big Picture: to continue on this topic, as you can see in the chart above, things have shifted quite a bit, so it prompted me early in the year to put this visual together to provide a map or conceptual framework to guide an eventual shift defensive (not yet, but steadily moving in that direction).       “But more importantly, checking back in on the sign posts. Valuations aren’t unanimously expensive (ERP looks decent – yields would need to go to 3% to make the ERP expensive), policy is still very easy, the economic recovery is still early in the process, and a fairly well-established uptrend is in play.” (22 Jan 2021)                 7. Commodity Value: in terms of specific asset class views, this was probably the one that worked best for me this year – and was very much closely aligned with the macro views outlined above. Again though, it was more of a “stay the course” (with high conviction) rather than a new earth-shattering idea as such.       “Remain bullish commodities medium term (but like the US dollar are at risk of a short-term correction as sentiment/positioning have moved to excess optimism). Helping the case here is cheap valuations, weak capex, positive medium term technicals (e g market breadth), and commodities are likely to benefit from a prospective global growth rebound (and weaker USD)” (6 Jan 2021)                 8. Oil vs Gold: on a similar note – within commodities, this was probably one of the most interesting and successful granular ideas: overweight oil vs gold (and energy stocks vs gold miners). Stepping back and looking at the chart below – even though it basically doubled this year it may not even still be done if we assume an element of mean reversion and further (eventual?) normalization.       “Given the fiscal stimulus outlook in the US, crude oil (and energy stocks) likely disproportionately benefits at the expense of gold (and gold miners): energy benefits from greater demand, gold faces headwinds from prospective rising real yields and improving risk sentiment. Quite a non-consensus idea at this point.” (6 Jan 2021)                 9. Emerging Markets Sentiment: while I will say I overstayed my welcome on the medium-term bullish view for emerging markets, the bearish tactical signals from sentiment did prompt me to attach a tactical bearish/risk-watch.       “First up is a scan of a couple of risk flags for EM equities: the short-term (50 day moving average) country breadth indicator has rolled over from overbought levels, the equal-weighted EMFX index has also rolled over after hitting resistance (diverging to the downside vs EM equities), meanwhile the EM composite sentiment indicator is approaching levels last seen during the late stages of the 2007 EM bull/bubble. Time to tighten up risk management.” (29 Jan 2021)                 10. Emerging Markets Fixed Income: as noted I had a bearish bias on bonds, which basically worked, but where it worked best was the bearish bias on EM – this chart in particular helped provide tactical clues on a fairly significant upshift in EM sovereign yields.       “EM sovereign yields remain slightly below my simple estimate of fair value (overvalued). Also of note is that 200dma yield breadth (i.e. proportion of EM countries whose 10yr sovereign yield is above its respective 200-day moving average) has been trending upwards (basically bullish divergence for yields: i.e. bearish divergence for EM sovereign bond prices).” (29 Jan 2021)             Thanks for reading!           This is an excerpt from my 2021 End of Year Special report - click through to download a free copy of the report.       Best regards       Callum Thomas   Head of Research and Founder of Topdown Charts           Follow us on:   Substack https://topdowncharts.substack.com/   LinkedIn https://www.linkedin.com/company/topdown-charts   Twitter http://www.twitter.com/topdowncharts
Weekly Macro Themes - 3 December 2021

Weekly Macro Themes - 3 December 2021

Callum Thomas Callum Thomas 03.12.2021 13:05
Here's a brief overview of the topics and charts covered in the latest edition of the Weekly Macro Themes report. I send this report out late Friday NZ time and aim to cover a good mix of macro/ideas/risk topics, across a global macro/multi-asset universe. This week I covered the following topics/ideas:   1. Sentiment & Technicals Check: We take a timely and comprehensive check-in on sentiment and technicals across global equities in the wake of the selloff. 2. Inflation Transit: "Transitory" has retired, and with that a policy pivot is underway. 3. Crude & Commodities: Currently viewing the crude oil crash as a “healthy correction”, some cause for optimism. On commodities in general it's about squaring up the short-term vs medium/longer-term case. The charts tell the story...     Request a trial of our institutional research service for your firm, simply fill in the form here. (n.b. the full service is aimed at fund managers and institutional investors)       About the Weekly Macro Themes report The "Weekly Macro Themes" is part of our institutional offering aimed at multi-asset and macro-driven portfolio managers and strategists. The report takes a chart-driven macro, fundamental and multi-factor approach; a powerful combination of cross-asset idea generation for portfolio managers, charts on key global macro trends, analysis on portfolio risks, asset allocation research, and innovative indicators, in a format that delivers a balance of brevity and depth so that you can efficiently assimilate the insights. Also part of the service is the monthly market cycle guidebook, global cross asset market monitor, and quarterly strategy pack. (or just follow us for now): LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Cleaning Up with Carbon Credits

Cleaning Up with Carbon Credits

Callum Thomas Callum Thomas 25.11.2021 08:59
The price of EU carbon credits hit a fresh record high last week following COP26. Global carbon prices are up 4x off the March 2020 low and 9x above the 2017 nadir. Retail traders and advisors can access the space through a growing ETF While appearing a bit faddish and overheated, the bull market in carbon could still be in the early phases   Winter is coming. Households in China, Europe, and the States will be faced with higher than average heating bills due to this year’s spike in commodity prices—namely in natural gas and coal. In a similar vein, credits of carbon offsets have also surged.   Carbon: The New Asset Class?   Carbon as an asset class has grown in popularity. Trading (and holding) carbon credits is a market born out of regulation. Investors might be familiar with the “cap and trade” concept. The idea is that regulators cap the amount of carbon emissions and then allow emitters to trade the credits. A cleaner environment is the goal while allowing the market to discover a fair price.   Scarcity Meets AUM   High government regulation and surging fund flows culminated in an interesting and volatile situation this year. Carbon credits are scarce, but investor allocations continue to pour in. The buyers of these credits are, of course, energy and utility firms, but demand grows from other corporate entities looking to put their green foot forward. Even golfer Rory McIlroy is paying up to reduce his carbon footprint. Retail investors have interest, too. Naturally, as prices rally and volatility increases, speculative traders enter the scene.   Prices Rally Following Regulation Talks   Last week, the European Union Emissions Trading System (ETS) Carbon Price notched a new record high above €66 following the COP26 conference which happened to coincide with a cold snap in the region. Carbon credits often become more valuable during a summer heatwave or winter cold blast due to higher power burns and electricity generation to meet demand.   Getting In on the Game   Retail investors and advisors don’t need a futures trading seat or a source of institutional credit to get in on the carbon trading action. The KraneShares Global Carbon ETF (KRBN) tracks the EU ETC carbon price fairly well. KRBN traded with very low volume up until energy commodity prices began to surge in 2Q21.   Our Weekly Macro Themes report details the growing interest in this unique asset. This week’s featured chart illustrates how much money is pouring into the carbon credit space. We aggregated all the carbon credit ETFs that trade globally. AUM in these exchange-traded products was just a trace a year ago ($35 million) but now approaches $2.5 billion.   Featured Chart: Carbon Credit ETF Assets Under Management   The growth in ESG flows is no joke, and it seems like nothing is stopping that freight train. But is the parabolic move in carbon credit ETFs just another mini-bubble we have come to expect as pandemic stimulus ignites a wave of speculation? It has the hallmarks of just that. Investor interest is driving up prices, but the nuance here is that the speculators might be less demonized given the arguably positive benefits to climate change (in contrast to speculators in other energy and agricultural commodities).   Search Trends and Price Correlation   Our weekly report investigates the similarities between ESG’s growth and interest in trading carbon credits. There is an obvious link. Google Search Trends of “carbon” matches the price chart of the EU ETS Carbon index. From an impact investing standpoint, putting upward pressure on carbon prices is a very direct way of influencing climate outcomes (by raising the cost of emitting and incentivizing investment in clean tech).   Bottom Line: Is this the new hot trading craze? Speculating in carbon credits? We are not there yet, but growth in the niche is surging along with prices. The rise in speculative manias over the last 18 months collides with the powerhouse that is growth in ESG. The bullish combination has led to substantial flows into the asset class and new all-time highs in price.   Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Weekly S&P500 ChartStorm - 21 November 2021

Weekly S&P500 ChartStorm - 21 November 2021

Callum Thomas Callum Thomas 22.11.2021 09:40
The S&P500 ChartStorm is a selection of 10 charts which I hand pick from around the web and post on Twitter. The purpose of this post is to add extra color and commentary around the charts. The charts focus on the S&P500 (US equities); and the various forces and factors that influence the outlook - with the aim of bringing insight and perspective. Hope you enjoy! p.s. if you haven’t already, subscribe (free) to receive the ChartStorm direct to your inbox, so you don’t miss out on any charts (you never know which one could change the whole perspective!) Subscribe Now 1. S&P 500 Seasonality Chart: It’s everyone’s favorite chart updated again (maybe for the last time this year?). The S&P500 has been sticking to the seasonality script through most of this year… makes me think about Murphy’s Law tho - maybe the market will start to improvise and go off-script? Either way, the next few weeks seasonally look like sideways action. Source: @topdowncharts 2. Volatility Seasonality: A twist on the previous chart — same concept, but this time with implied volatility. I find it interesting to note that the VIX has actually been a bit lower than usual for this time of the year (and trending up short-term…). One last VIX spike before year-end? Source: @topdowncharts 3. Stockmarket Statistics: What happens after the market goes up a “crazy overheated” 20%+ over the course of a year? More Gains. Historically most of the time if the market closed up 20%+ for the year, the next year was also positive (84% of the time). As of writing, the market is up some 27% YTD (albeit, this year ain't over yet!). Source: @RyanDetrick 4. Bad Breadth? Fully 1/3rd of stocks are in a downtrend. (defined as trading below their respective 200dma) Will this bearish divergence be a problem? Source: Index Indicators 5. GAARP vs GAAAP: On this metric, growth stocks are the most expensive ever vs value stocks. So it begs the question… Growth at a reasonable price? or Growth at *any* price? (but then again, who defines what "reasonable" is in a market like this!) Source: @TheOneDave 6. Low Energy: Energy stocks are attempting to turn the corner vs the rest of the market, but face high hurdles from the raging tech bull market, rise of ESG investing and regulatory/political hurdles, not to mention commodity market volatility. What comes down must go up? (or something else?) Source: @dissectmarkets 7. Buybacks Back: New all-time high for buybacks in Q3 (with 95% reported). Always makes me wonder these trends — you see the majority of buybacks occurring near market peaks… i.e. when valuations are extreme expensive. The opposite of value investing: buy more when its expensive, buy less when it’s cheap — seems like upside-down logic to me, but then again I am a simple man. Source: @hsilverb 8. Payout Ratio: As an interesting follow-on to the ATH in buybacks/dividends, it’s interesting to note that the dividend payout ratio is actually below average... Scope to return more cash to investors? Source: @ChrisDagnes 9. Buffett Indicator: Looks like this indicator has reached a permanently higher plateau! (kidding of course - echoing the famous last words of Irving Fisher back in 1929) Interesting stat to note: to make this indicator as cheap as where it got to during the financial crisis lows the market would need to fall over 70%. Definitely not a prediction, but interesting nonetheless. I would say I have multiple quibbles with this indicator, I think CAPE and ERP are better valuation metrics, but that’s a topic for another day. Source: @KailashConcepts 10. Buffett the Compounder: Speaking of Buffett, a lesson in compounding. Source: @DividendGrowth Thanks for following, I appreciate your interest! !! BONUS CHART: total stockmarket leverage >> Click through to the ChartStorm Substack to see the bonus chart section https://chartstorm.substack.com/p/weekly-s-and-p500-chartstorm-21-november                   Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Weekly Macro Themes - 12 November 2021

Weekly Macro Themes - 12 November 2021

Callum Thomas Callum Thomas 12.11.2021 15:36
Here's a brief overview of the topics and charts covered in the latest edition of the Weekly Macro Themes report. I send this report out late Friday NZ time and aim to cover a good mix of macro/ideas/risk topics, across a global macro/multi-asset universe. This week I covered the following topics/ideas:   1. US Credit Spreads: Continuing to monitor risk indicators for credit as valuations reach extreme expensive/complacent; focused on a specific set of macro indicators (which look good at the moment) as a trigger to shift bearish. 2. Gold Price Outlook: Slight change to the view given where technicals, sentiment, positioning, monetary signals and valuations sit. 3. Gold & USD: Conventional wisdom says a stronger dollar would be a headwind to gold, we dig into this conventional wisdom to see if it is actually wise and also review the outlook for the US dollar. 4. Gold Miners: Reviewing the outlook for gold miners given valuations, positioning, market breadth, technicals, and intermarkets. 5. Silver: We also review the suite of indicators for silver and lay out the near term outlook and parameters for the next steps.     Request a trial of our institutional research service for your firm, simply fill in the form here. (n.b. the full service is aimed at fund managers and institutional investors)       About the Weekly Macro Themes report The "Weekly Macro Themes" is part of our institutional offering aimed at multi-asset and macro-driven portfolio managers and strategists. The report takes a chart-driven macro, fundamental and multi-factor approach; a powerful combination of cross-asset idea generation for portfolio managers, charts on key global macro trends, analysis on portfolio risks, asset allocation research, and innovative indicators, in a format that delivers a balance of brevity and depth so that you can efficiently assimilate the insights. Also part of the service is the monthly market cycle guidebook, global cross asset market monitor, and quarterly strategy pack. (or just follow us for now): LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Inflation Risk Outlook: Backlogs Bite

Inflation Risk Outlook: Backlogs Bite

Callum Thomas Callum Thomas 26.10.2021 14:27
The weight of risks is skewed to the upside for inflation as individuals and businesses grow more anxious about higher prices Supply disruptions, rising inflation expectations, and sentiment effects all lead us to reiterate the upside risks Core inflation pressures are also on the cards as capacity tightens Stocks seem generally unphased so far, but risks lie with how policymakers react You don’t have to search long to find inflation. It’s apparent at the grocery store, on TV, and on Google Trends. Last week, however, the narrative seemed to take a more drastic turn. Many in the “transitory” camp at least dipped a toe into the “permanent” waters. To wit, the UK 10-year breakeven rate surged to 4.24%, the highest in 25 years. In the US, the 5-year TIPS breakeven yield spiked to 3%. Our flagship Weekly Macro Themes report dived deep into the major puzzle pieces coming together to reiterate the upside risks to the inflation outlook. Supply Chains Front and Center Driving the uneasiness surrounding higher prices is undoubtedly the resurgence in supply chain issues. For a time during Q3, it appeared conditions at ports and shipping terminals were improving. Then the second wave of backlogs hit right as consumers geared up for the holiday shopping season. Indeed, everything is not ship-shape as evidenced by the chart below. Featured Chart: Surging Searches for Supply Chain Disruption & Backlogs Stocks Taking It in Stride How traditional economics solves the supply chain horror show will be fascinating to watch. It will take either expansion of capacity (temporary or permanent) or alternatively: softer demand. By way of the equity markets, it seems investors are content with whatever plays out. Equity indices are basically at or near all-time highs despite the onslaught of negative press surrounding business logistics. Bad Surprises Ultimately, inflation is what consumers are concerned about. Google Search Trends for terms like “inflation” has jumped to new highs as the global median inflation rate creeps up on 4% (from less than 2% through much of 2020). Moreover, the G10 Inflation Surprise Index is at its highest reading in more than 25 years. Expectations Are Hot In terms of inflation expectations, both business and consumer groups are more wary than the market. Consumer and business inflation expectations are some 2 standard deviations higher than long-term average. As time persists with rising prices front of mind, behavior will begin to shift and negotiations/contracts (prices!) will reflect this. Wage Growth Underscores Permanent Inflation Risks Powering higher prices is robust wage growth. The labor market remains tight for many developed economies, particularly in the US. Jobs are easy to get and staff are hard to find. As such, the latest NFIB survey reports a record percentage of small businesses expecting to raise worker compensation. It’s also never been more difficult to find workers, according to the NFIB report. Wages are sticky—once they go up, they rarely come back down. Higher pay is a major arrow in the quiver of team “permanent”. How Will Central Banks React? The Federal Reserve will have its say. Inflation fears could spark a quicker tightening cycle in developed economies. We already see it across much of the Emerging world. Earlier than expected rate hikes might derail the recovery and thus greatly slow the headline inflation rate. Also, consider that base-effects will be stout next year, helping to slow the rate. Bottom Line: We continue to see upside risks to global inflation after initiating the view at the start of the year. With a mix of short and medium-term factors at play, we see this key theme of 2021 continuing in importance into 2022. Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Weekly S&P500 ChartStorm - 24 October 2021

Weekly S&P500 ChartStorm - 24 October 2021

Callum Thomas Callum Thomas 25.10.2021 10:00
The Chart Storm is a weekly selection of 10 charts which I hand pick from around the web (+some of my own charts), and then post on Twitter. The charts focus on the S&P500 (US equities); and the various forces and factors that influence the outlook - with the aim of bringing insight and perspective. Hope you enjoy! p.s. if you haven’t already, subscribe (free) to receive the ChartStorm direct to your inbox, so you don’t miss out on any charts (you never know which one could change the whole perspective!) Subscribe Now 1. Enter the Doji: Curiously enough (one for the fans of candle sticks), a doji formed in the S&P 500 daily chart on Friday. According to the ever-wonderful Wikipedia: "Dojis form when the opening and closing prices are virtually equal… the doji represents indecision in the market." Perhaps the most important point: "A doji is a key trend reversal indicator." (and this he says as the market reaches a logical overhead resistance point). Source: @Callum_Thomas 2. Value Stocks — New ATH: While the main S&P500 Index was forming a doji on Friday (and apparently running into resistance), the S&P500 Value Index was busy making a new All Time High… and as it seems was also extending what looks to be a breakout from about a 6-month trading range. Looks good. Source: @topdowncharts 3. Value vs Growth - Long Term Perspective: Zooming out, and comparing the performance of value vs growth stocks, it’s still very much a work in progress. You know what they say, some times when you’re in a deep hole you just have to keep digging. At the very least, based on my indicators there is deep value in value vs growth, so certainly an interesting area of the market to keep tabs on. Source: @topdowncharts 4. Energy (under)Investment: One aspect of value stocks - the Energy sector - looks set to benefit from stagnant investment in supply. This is an interesting chart by itself but all the more interesting when seen alongside the next couple charts… Source: @Theimmigrant84 5. Energy Sector Allocations: On energy stocks, ESG investors are understandably underweight energy (given carbon intensity, environmental impact of Oil/Gas/Coal), but so too are traditional active managers. The (traditional/fossil fuel) energy sector is all out of love! Source: @MikeZaccardi 6. Global Energy Stocks: Global energy stocks also trying to turn the corner, and the relative performance line looks like it is trying to catch back up to resurgent oil prices -- and that’s a big gap to close! Source: @RichardDias_CFA 7. Buybacks Back: The majority of buyback blackouts are wrapping up the next week (and p.s. there are record buyback authorizations aka dry-powder lying in wait). This could become a key source of buying to underpin the markets or even fuel the typical year-end rally (mentioned last week). Source: @zerohedge 8. SPACtacular: SPAC deal flow (YTD!) in 2021 is far outpacing the total for all of 2020. Very interesting dynamic in the markets, and a nod to the still ample liquidity and risk appetite we see permeating the markets. Source: @spac_insider 9. Capitalism vs Communism: Chinese stocks remain in a 13-year relative bear market vs USA. Are they near a logical turning point? Source: @mark_ungewitter 10. China A-Shares: Despite the news flow, Chinese A-shares have been a range-trade lately. Longer-term it looks like an uptrend, but strictly speaking given the lower highs it’s probably more of a gigantic symmetrical triangle pattern! This is one of those very policy-driven markets that’s either ON or OFF, and I would say (despite relative policy forbearance so far) it's probably only a matter of time before policy makers end up flipping the switch one way or another. Source: 10 Charts to Watch in 2021 [Q4 Update] Thanks for following, I appreciate your interest! BONUS CHART: WTI Crude Oil seasonality chart >> Click through to the ChartStorm Substack to see the bonus chart section [free] https://chartstorm.substack.com/p/weekly-s-and-p500-chartstorm-24-october Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Trend Lines - Well Known, Less Understood

10 Charts to Watch in 2021 [Q4 Update]

Callum Thomas Callum Thomas 22.10.2021 13:16
Welcome to the fourth quarter - the final stretch of the year! Things have certainly moved on since my original post (both in terms of market movements and the general consensus/sentiment). So I thought it would be helpful to take a quick progress check on the "10 Charts to Watch in 2021". In the original article I shared what I thought would be the 10 most important charts to watch for multi-asset investors in the year ahead (and beyond). In this article I have updated those 10 charts, and provided some updated comments. [Note: I have included the original comments from back at the start of the year, so you can quickly compare what I'm thinking now vs what I said back then] 1. Mega Theme: This rather interesting and diverse basket of ideas initially had a very strong run, but for a variety of reasons took a bit of a breather (e.g. sentiment was probably a bit over-cooked on a few of them, and delta resurgence injected a bit of volatility, uncertainty, and reversed a few emergent market trends). But with covid tapering, Fed tapering, and a good washout in sentiment (e.g. some of the consensus themes at the start of the year have either been forgotten or fallen completely out of favor), things seem to be back on track. I am still basically happy with all of the ideas - albeit I currently still have EM on risk watch [pending the all-clear in the key risk indicators]. "In the last regular edition of the Weekly Macro Themes report of 2020, I decided to combine all my big ideas into one “mega theme” given some of the echoes across the ideas in terms of price action and macro drivers. The result is this interesting chart which looks to be either at or near the bottom of a long-term secular trend, and the start of at least a short-term cyclical upturn." 2. Monetary Policy (limits): Lending standards are quickly being relaxed as glimmers of greater certainty and at least better economic conditions are driving banks to look for growth. This comes as policy is turning the corner and rates are steadily starting to rise across the globe. There are a few echoes of the post-financial crisis period (2009-12) in this chart, and I think this adds up to a window of easy credit conditions and low borrowing costs (at least before central bankers are dragged into hiking rates further/faster): this should be supportive of the much needed capital expenditure that arguably a lot of sectors are overdue to execute (e.g. commodities, shipping), not to mention green energy and infrastructure investment. "The policy response to the pandemic was historic in terms of its speed, magnitude, and coordination across countries and between fiscal and monetary. But this chart perhaps highlights one limitation of monetary policy, the tag line is “interest rates are low, but good luck getting a loan” (given how much banks tightened up on lending standards). One thing on my mind is a possible passing of the torch from monetary policy to fiscal policy – as that’s going to be the thing that will achieve a more balanced and more transformative impact in the recovery." 3. Global Trade Rebound: This has probably been one of the most important charts this year in so far as it reflects the key driver of backlogs (more on that in the next chart) - i.e. resurgent global trade demand. Going forward we can see the lead indicator tapering off - it was always going to be hard to maintain such a rapid pace of growth as compared to the collapse of 2020, but equally, supply chain disruption/logistics issues/shipping costs/raw materials shortages/energy costs ...etc! are weighing on this as a constraint to growth. "The global economic shutdown saw an abrupt collapse in trade growth. But since then we have seen clear green shoots and the leading indicators point to an acceleration and continuation of the global trade growth rebound into 2021." 4. Global Backlogs: Ultimately I still think that the process of clearing backlogs will need to be done partly with greater activity (get the factories running overtime, invest in more capacity, re-stock inputs, etc) - so I believe aside from being a short-term constraint, that it also has the possibility to drive a further expansion of activity to work through it. Meanwhile it still seems the pricing pressures will be with us until either we see the above mentioned measures on the supply side or simply a tapering of demand. The latter seems unlikely for now, and the former will take time. One thing to note though: the chart sure does seem to show a climax on both fronts. "A nice follow-on, the surge in backlogs (resulting from global supply chain disruption) has 2 key implications: upside risk to inflation, and a likely spike in activity as firms attempt to clear backlogs and restock inventories." 5. Consumer Normalization: There is hope. Consumers have gone from gloom to boom as asset price inflation (stocks, real estate, crypto, NFTs, an just about any traded asset!), the pandemic/lockdown induced jump in savings (albeit uneven: some have seen a jump in savings account balances, while others have had their savings wiped), very easy financing conditions and cheap borrowing costs, and increasing signals of wage inflation have all combined along with tapering of covid cases and vaccine progress - glimmers of hope of normalization have spurred things back to life on the consumer front. I think there is still gas in the tank here and see the consumer (along with capex) driving the second wave of the recovery. "Consumer moods remain depressed *outside of China*. This chart provides a sort of playbook for the rest of the world, as well as a key means of keeping track of normalization, and a nod to a potential consumer boom post-vaccine." 6. US vs the Rest of the World: This one is still a work in progress on both fronts - on the equities there is still an extremely compelling relative valuation case for global vs US (and anecdotally sentiment is fairly one-sided - based on how much pushback I get on Twitter!). On the US dollar, it's gone full circle from consensus bearish at the start of the year to now increasingly consensus bullish. On the basis that I haven't seen a good reason to abandon the bearish USD case (especially on the technicals - where the medium/longer term bear case has not been invalidated yet), I'm staying the course on both views... but back on the technicals: awaiting confirmation to ramp up conviction. "All the key pieces of the puzzle seem to be falling into place for the rest of the world to start outperforming vs US equities. Along with that, I expect ongoing weakness in the US dollar." 7. Commodities: This one has worked, really well. Which makes things a little complicated - I still see a very compelling case for stronger commodity prices (e.g. underinvestment in supply, thematic demand tailwinds, cyclical demand tailwinds, short-term supply disruption)... but at the same time sentiment and technicals look a little stretched. In terms of valuations, it's about neutral (i.e. not showing up as expensive - yet). "Given cheap valuations, a prolonged period of weak capex (i.e. futures supply tailwinds to price), pandemic disruption, an expected weaker USD, and economic recovery (with potential overshoot), remain decidedly bullish here." 8. Real Yields: With Fed taper looming, a prospective second wave of the recovery, fiscal stimulus on the cards, and a fairly compelling case for at least higher nominal yields... it seems clear to me that the risks are skewed to the upside for real yields. But in the short-term I am mindful that inflation expectations have been gaining momentum lately, and could get kicked into a self-reinforcing loop. Again, we're left watching the technicals for confirmation/triggers either way. "In my view the two key drivers of US real yields are risk sentiment and growth expectations. Naturally on both fronts it was entirely rational to see real yields plunge this year. Going forward I expect improved risk sentiment and a rebound in growth expectations; therefore I expect higher real yields (and nominal yields)." 9. Crude Oil vs Gold: This one was quite an interesting and very non-consensus idea when I first started talking about it, and the way things are going (gold still looks bearish - esp. with the risk of higher real yields, and oil is going from strength to strength), it's entirely possible it goes further... hash-tag: Mean Reversion. "The logical next question should then be “what about gold?”. All else equal, a prospective environment of higher real yields would present a headwind to the consensus and crowded long gold trade. Aside from that, I believe a prospective passing of the torch from monetary to fiscal in the US is strong possibility (incoming Treasury Sec. Yellen has a deep appreciation for the limits of monetary policy and the need for fiscal policy to do more of the heavy lifting). This along with post-vaccine normalization should disproportionately benefit oil at the expense of gold, so I suspect we see some mean reversion in this chart." 10. Chinese Equities and Emerging Markets: Despite the news flow, Chinese A-shares have been a range-trade. With this infamously ON/OFF market, it's probably only a matter of time before policy makers end up flipping the switch one way or another. Until then, I prefer EM ex-China on relative value, and in particular prefer EM ex-Asia (relative value, sentiment/positioning, intermarkets, technicals). "Last but not least is China. While I continue to watch a wide range of indicators, one in particular focus will be China A-shares, particularly as they brush up against a key overhead resistance level, and as policy makers in China possibly move toward actually tightening monetary policy in 2021. Indeed, in many respects, I suspect it will be more of China zigging, while the rest of the world is zagging. In any case, I remain convinced that it is still one of the most important economies and markets to watch in understanding the global macro/market picture." Summary and Key Takeaways: Policy is in the process of pivoting away from easing, but a window of low rates and easy credit conditions should help the recovery (especially capex). Also likely helping the second wave of the recovery is the consumer going from careful to cheerful, and a likely required flurry of activity to clear ongoing backlogs. The weight of risks still seem skewed to the upside for commodities (and down for USD), and hence short-term inflation pressures look likely to persist. The outlook across risk-assets is heavily nuanced; look for relative value, sentiment shifts, and alignment with the macro/thematic outlook for best results. Particularly mindful of the swing in consensus views: many of the big ideas for 2021 have been abandoned or reversed (wrong again?). Still plenty of interesting opportunities out there! Best regards, Callum Thomas Head of Research & Founder at Topdown Charts Twitter: https://twitter.com/Callum_Thomas LinkedIn: https://www.linkedin.com/in/callum-thomas-4990063/ Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts
Weekly S&P500 ChartStorm - 24 October 2021

The Big Thing in Small Caps

Callum Thomas Callum Thomas 22.10.2021 12:54
US small caps have outperformed as investor sentiment recovers from Q3 lows Further relative strength is likely among cyclicals which comprise more than half of the S&P SmallCap 600 While absolute valuations don’t scream value, the smalls have dropped back to cheap levels relative to large caps Recent Small Cap Strength We’re checking back on our bullish 6–12-month outlook established in August. At the time, money was flowing (or fleeing?!) out of small cap equity funds and investor positioning was defensive. After the Russell 2000 peaked in mid-March and as earnings have improved throughout the year, valuations are more favorable. Two months after our original article, US smalls have rebounded after dipping in September. There’s still work to be done. Who hasn’t seen that ugly year-to-date chart of IWM? We assert that small caps are attractive versus large caps based on relative valuation, a sentiment shakeout, and the group’s sector tilt given the current macro/cyclical situation. Traders who are overweight the group should stay the course. Higher Rates Are a Boon Driving outperformance lately has been rising bond yields. While history shows little support for the narrative that increasing interest rates hurt large growth stocks, correlations can change. A one-year chart of your favorite large cap tech ETF overlayed with TLT or IEF clearly shows a relationship. A positive correlation holds for domestic cyclicals—as yields have risen this year, small stocks have outperformed. Cyclicals Charging Ahead Digging deeper, it’s the composition of US small caps that stands to benefit from a more optimistic economic growth scenario. We talked about a “second wave of the economic recovery” that would likely see value stocks leading the way. Indeed, that thesis has taken shape over the last few weeks. The S&P SmallCap 600 index has a 55% weight in Cyclicals whereas the S&P 500 has a mere 25% weight. Tech stocks make up half of US large caps and less than 30% of the S&P 600. As rates rise, cyclicals tend to beat tech stocks, hence small equities have had the advantage over the last 52 weeks. In fact, cyclicals are a bigger share of the S&P600 today than at any other time in the last 20 years. Featured Chart: US Small Caps’ Cyclical Tilt Looking Ahead What might fundamentally cause a more positive business outlook for smaller firms? An uptick in real economic activity, a capex boom, high demand for commodities, and backlogs unwinding. All of these scenarios seem plausible in the next year. We discuss several of these factors in our Weekly Macro Themes report. Don’t underestimate Central Bank policy implications either. Barring a catastrophe, the Fed will start tapering next month. The market also believes a rate hike is in the offering—perhaps as soon as June next year. Again, rising rates favor an overweight to small issues. Intriguing Relative Value We study flows, positioning, macro indicators, and of course valuation. The relative value picture is favorable for the S&P 600 and Russell 2000 indices. With the S&P 100 mega cap index beating the S&P 600 over many timeframes, small caps now comprise just 2.5% of the S&P 1500 (total US equity market)—below its long-term average near 3%. The Russell 2000’s relative valuation is a full standard deviation below its long-term average versus the S&P 500, underpinning the case for an overweight US small cap position. What’s more, the S&P 600 no longer trades at a premium to the S&P 100 (though PE10s on both are stretched). And therein lies the caveat: Absolute valuations are high on all of these US equity indices - so it's more about the relative case (i.e. smalls vs large). Bottom Line: We reiterate a bullish intermediate-term stance on US small caps. Recent rising bond yields have brought about a second wave of outperformance from the group, underscored by strength in cyclicals. We believe this trend persists as the economic cycle progresses. Following investor pessimism in August, flows and positioning are turning up. Finally, the smalls show relative value versus large caps. Follow us on: Substack https://topdowncharts.substack.com/ LinkedIn https://www.linkedin.com/company/topdown-charts Twitter http://www.twitter.com/topdowncharts

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