A key macro model indicates that US economic activity, measured by the ISM index, is set to accelerate. This forecast suggests a period of economic strengthening is beginning, creating a positive environment for the stock market. Investors should consider increasing exposure to risk assets that perform well during economic expansions. Specifically, this includes the broader stock market and cyclical stocks, which are highly sensitive to economic growth. This outlook is based on leading liquidity indicators that have already turned positive, providing a strong basis for this forecast.

The "Everything Code" Macro Framework

• This framework is a model used to forecast asset prices by understanding the sequence of key economic indicators, referred to as the "Everything Code Dominoes."
• The core idea is that certain indicators provide a significant lead time on future economic activity, giving investors a potential roadmap. The sequence is as follows:
  1. Financial Conditions move first.
  2. Liquidity follows Financial Conditions after about 3 months.
  3. Economic Activity (ISM) follows Liquidity after about 6 months.

Key Components

• GMI Financial Conditions Index: This is the earliest leading indicator in the model, providing a potential 9-month lead on the direction of the economy.
  • It is calculated using a combination of commodity prices, the US dollar, and interest rates.
• GMI Total Liquidity Index: This measures the total amount of money and credit in the global financial system. It provides a 6-month lead on the economy.
  • It is calculated using Global M2 (a broad measure of money supply) and central bank net liquidity.
• ISM (Institute for Supply Management) Index: This is a key indicator of US manufacturing health and is used here as a proxy for the overall business cycle and economy. It is a lagging indicator in this framework.

Takeaways

• The primary insight is that by monitoring the GMI Financial Conditions Index, investors can get a potential 9-month advance signal on the direction of the broader economy.
• An improving (rising) Financial Conditions Index would signal that liquidity is likely to increase, which in turn suggests economic activity should strengthen. This is generally a bullish signal for risk assets like stocks.
• A deteriorating (falling) Financial Conditions Index would suggest the opposite, serving as a potential bearish warning sign for the economy and risk assets.
• Specific Forecast Mentioned: Based on the leading liquidity indicators, the podcast suggests that the ISM should now finally begin to accelerate.
  • This implies that the model is currently forecasting a period of economic strengthening.
  • For investors, this can be interpreted as a positive sign for investments that typically perform well during economic expansions, such as cyclical stocks and the broader stock market.