Financial Market Forecasts

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Precious metals, especially silver (shown above), provided the best alpha generation in Q2 2024, followed by gold. They rallied impulsively, as our market models predicted, driven by increased global entropy. 

Q1 2023 PERFORMANCE REVIEW CONTENTS

We recommend that subscribers to our Macro CIO's View take the time to read this analysis of our performance to enhance their understanding of how we consistently extract alpha from the markets whilst minimising our downside risk on entry points with extremely tight tactical stops that are then actively managed as the trade moves in our favour.

1. Executive summary: Global Forecaster and Global Trader.
2. Trade recommendation and risk methodology.
3. Our key 2024 year ahead geopolitical calls.
4. Our main Q2 2024 geopolitical calls.
5. Q2 2024 market predictions and performance.
6. Alpha captures long-short fund performance.

1.0 EXECUTIVE SUMMARY

Our Global Forecaster geopolitical and market calls have once more proven accurate during Q2 2024 as they unfold slowly before our eyes. We predicted that:

1. The second Russian offensive would see Putin apply increased pressure on Ukraine until sufficient US aid flows in.
2. Both the war in Ukraine and Iran's war with Israel via Hamas, the Houthis, and Hezbollah would escalate, drawing in the nations of the Axis of Autocracy ever more deeply.
3. Underlying inflation would keep increasing, driving bond prices (and equities) lower.
4. Accelerating inflation would push bonds lower in the early phase of a US debt crisis as spending increases, especially on defence.
5. The banking crisis would see a third chapter as bond prices fell, led by European Banks.

Global Trader covers six macro sectors - with some 80-plus markets - and has been producing exceptional alpha extraction since its inception in 2019. In summary, Q2 2024 could best be characterised by the continued rally of the safe havens: crypto and precious metals. Our capital preservation methodology has been a critical part of our risk performance, based on our ratchet risk-to-stop methodology (explained below).

1. Our best performance has come from precious metals as the safe havens rallied strongly.
2. We have generated alpha in all sectors, suggesting that our overall market scenario is playing out.
3. The worst sector performers were the equity, with mixed results between the US and EU.

2.0 TRADE RECOMMENDATIONS AND RISK METHODOLOGY

2.1 GLOBAL TRADER – DESIGNED FOR RISK TAKERS

Global Forecaster was set up in the summer of 2019 to inform and advise professional asset managers through troubled waters. During that year, there were obvious indicators that global markets were soon to peak (in February 2020) and collapse, with the most grievous consequences. We have called this transition The Great Shift as it is driven by the intersection of the peak of the K-wave cycle and the hegemonic challenge of China to America and the West.

We continually seek to quantify the accuracy of our trade recommendations as they translate into real-time market positions that are readily actionable by risk managers. We are pleased to report that the system we have used over the past five years (plus) has produced a very accurate representation of our market calls in the direction, size, and magnitude of the move. This has allowed risk takers to quickly assess the accuracy of our past predictions in any market or sector, as well as benefit from our trade recommendations.

The structure of our trade recommendations allows our clients to apply them directly to their portfolios. Similarly, we go a stage further for some clients by taking our trade recommendations and applying them to specific alpha-capture platforms with outstanding results. This service is available upon request.

2.2 GLOBAL TRADER METHODOLOGY AND STRATEGY

Global Forecaster and Global Trader now has 20 quarters of performance under its belt, and the results of our geopolitical predictions, market predictions, and alpha-capture fund performances have been exceptional. We believe the key to high returns and long-term success is based on:

1. Prescient market views generated within a systematic multi-timeframe and price modelling system, which combines our geopolitical and market behavioural models.
2. Our strategy of trading, which is to seek alignment with long-term trends and then to find short-term counter-trend entry points that translate into long-term time frames, producing tight-risk rewards on entry as well as high multiple-risk returns.
3. Our tight-risk rewards on entry may mean that sometimes an entry point might require several attempts. A spreadsheet is available on request to explain all the trades that are displayed on the website and in the summary tables below.
4. Good trade entry points with tight and structurally meaningful stops (entered with contrarian price modelling).
5. Appropriate position sizing – to remind you of our methodology behind each trade recommendation; each real-time idea has a risk unit, defined from the entry point to the stop level, and a trade idea in one market can have a maximum of 400%, which equates to 40 risk units at any one time. Trade recommendations can be either 100% or 200%. The 400% limit in a market can be put on all at once or in combinations of sub-trades. High-conviction trades require the time frames of short, medium, and long to all be aligned. Notably, since Q2 2021, the conviction levels have been and continue to be very high due to the strong integrated signal strength associated with our price and geopolitical models.
6. Ongoing trade management by following the progression of a trend by lowering stops where appropriate.
7. Successful trade exit points that ideally replicate the dynamics of point 2 above by precisely picking the end of the trend.

These key points describe Global Trader's risk methodology. By reading the below quarterly performance appraisal, you will have a better idea of how we apply our risk allocation methodology, as well as how we combine geopolitical predictions using various models from Breaking The Code Of History. All of these real-time predictions have been published on the Global Forecaster website and are available to our clients.

3.0 OUR MAIN 2023 GEOPOLITICAL PREDICTIONS

3.1 2023 – THE YEAR TO STAY UNDERCOVER

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Our main predictions for 2024 were outlined in 2024 – The Year To Stay Under Cover. One of our core investment themes was that 2024 would be:

The Year of Precious Metals
For those who subscribe to our Global Trader Product, we have been advocating the main financial survival strategy to be focused on Bitcoin and even more heavily weighted to precious metals and their associated mining stocks. We believe that this year, this strategy will prove to be the only game in town. Whilst bonds will fall significantly and will only accelerate lower with inflation and debt issuance, precious metals have held their value, completed a major correction, and are now only in the foothills of a powerful once-in-56-years rally to new highs and beyond.

3.2 GEOPOLITICAL PREDICTIONS RELEVANT TO Q2 2024 

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As expected, the calm before the storm has been replaced by increasingly entropic war events that have now manifested in:

• Ukraine as it pulled North Korea and China into an active alliance.
• Iran's war with Israel over Gaza, in Lebanon, and in the Red Sea.

We view this not as an isolated event but one linked to the collapse of American hegemony. It is also to be viewed as part of an alarming global pattern of expected escalation into a fully kinetic and global WW3, one that ultimately involves China opening hostilities across the Asian basin in the scenario we call Red Lightning.

Thus, we seem to be at the confluence of geopolitical and market events of a significant magnitude, with an oil rally being the key market trigger. The specific areas that we highlighted for geopolitical risks in Q2 2024 were:

1. The entropy of war will keep escalating. The hegemonic challenge of the Chinese-led Axis of Autocracy against America and its democratic allies has continued to build momentum, to the point where we assess that global war - AKA a fully blown WW3 - is now 95% inevitable. Put simply, the nations of democracy are losing their wars against the autocratic alliance, only encouraging accelerated aggression. This was correct and is unfolding.
2. The Ukraine counter-offensive would see Putin increase pressure on Ukraine as US support dried up and the war escalated into an ever more direct confrontation with NATO. This was correct and is unfolding.
3. Underlying inflation will keep moving higher; we expect wage and input inflation to continue to move higher as the habit of inflationary dynamics takes hold, driving bond prices (and equities as bonds accelerated) lower and the yield curves to steepen, an effect that will be supplemented as energy and commodities surge due to wartime resource constriction. Notably, we expect that commodity input inflation in the coming Wave 3 will start to feed back once more into top-line inflation (see Inflation Expectations Are Increasing As Predicted). We were encouraged in our prediction by Andrew Bailey who, at the lows of the oil price, boldly insisted that Inflation was about to fall 'markedly', even as he signalled the Bank of England would have to keep raising interest rates. The Governor said that tumbling energy prices and cheaper food would help to drive down inflation for the rest of this year. AB is our favourite inflation reverse indicator, and it is no coincidence that he called for lower inflation in 2024 - at the oil lows - just when we were predicting that commodity prices had completed their correction and would commence their next surge higher (!), at which point, in contrast, we correctly predicted that the next commodity surge into war had commenced with the energy/commodity sector, which had started one of its biggest rallies in 56 years, into an expected peak in 2030. This peak is all about resource constriction and escalating global conflict. This was correct and is unfolding.
4. The Israeli war with Iran would escalate to a regional war, sending oil prices through the roof and catalysing Xi’s war, as outlined in The New Age of War; Chapter 2: Israel and the Middle East, Dimensions of American Decline 10: Biden, Afghanistan, Ukraine and Now Israel, The Iranian/Hamas Trap Is About To Spring Shut On Israel and America, and Iran’s War on Israel 11; Imminent Nuclear Breakout and the American Response
   1. 1. Firstly, it has, via its proxy Hamas, managed to get Israel engaged in a battle for Gaza that will last for many more months, even after it has invaded the last Hamas bastion of Rafah. The great strategic success of this conflict so far has been the mobilisation of the international community's anti-Israel sentiment as personified by the ICC's indictment of Netanyahu and, even more importantly, the creation of a major fracture in the US-Israeli relationship.
      2. Secondly, Iran has, through its massive missile attack on Israel, created the space to make its nuclear breakout that would change the dynamics in the region forever.
      3. Thirdly, Iran's Houthi proxies have humbled American maritime hegemony by keeping the Red Sea closed. In so doing, they have provided a proving ground for China’s area-denial strategy, using much more sophisticated ASBMs and hypersonic missiles in mass waves to push America out of the second island chain.WW3; The Battle For The Red Sea Has Changed War At Sea Forever.
      4. We conclude that Full-Blown War in The Gulf Is Now Inevitable and that, as outlined in WW3; The World Is On The Brink, followed by Iran's War On Israel 9: Over The Brink, escalation of the war in the Middle East is now inevitably going to erupt into a full-blown war between Israel and Iran. Our prediction was that we will see an Israeli attack, to which Iran will respond with the next step of escalation that ultimately will see the close of the Gulf, sending oil through the roof, at which point the US will have to join in. However, based on the USN's failure to defeat the Houthis and to maintain the open sea lane, as outlined in Iran’s war on Israel 5; The Battle for the Sinai Sea Lanes, such an escalation bodes badly for a swift conclusion to any war. Hence, we expect that this regional war will be significant and last for many years. We predict that it will initially be a long-range war that will favour Israel with its comprehensive missile shield (even if the US and UK abandon Israel). In the meantime, we expect that the consequent commodity flow constriction consistent with the C-wave of the unfolding K-wave cycle into the 2030 peak will send oil to new highs, sky-rocketing global inflation levels.This was correct and is unfolding and putting upward pressure on oil prices and safe havens.
5. The Chinese demand gap would force Xi’s hand into war. In March 2020, Xi shifted his economy from a manufacturing, export-driven nation into one that slowed its exports, collapsed its capitalist social camouflage, and stockpiled commodities on a massive scale, as described in Red Peril 20; China's Increased Polarisation, Aggression and Bifurcation. The result is a demand gap that has seen the Chinese economy slow down significantly, compounded by numerous CCP economic decisions that do not make sense in peacetime, unless they represent a wholesale economic plan to prepare for a wartime economy that can survive total bifurcation from the West. This includes the lowering of US Bond holdings. The rapid borrowing by local governments has fostered an illusion of prosperity. However, China’s development model has been to issue a tremendous amount of loans to non-performing projects, particularly the housing industry. Yet, now the housing market is collapsing, with dire consequences. The consequences are similar to that of the Nazi four-year plan instigated in March 1936, which meant that in preparing for war, the German economy would be bust by 1940, so had to use its military capability or implode. Xi is thus in the same position as Hitler was, where he either uses it or loses it. As we have regularly stated, dictators always warn what they are going to do, and liberal democracies always discount it as rhetoric, until they are attacked! In Xi's case, his intentions are very clear, as we outlined in Red Peril 13 – Read My Lips: I Am Preparing China To Go To War. One only has to look at the recent changes to Chinese law, the economic strategy, and of course the military expansion, complete with the development and deployment of ballistic carrier-killing missiles and hypersonic missiles that can be deployed in massive waves to overcome all defenses, without warning. To cement the picture, the massive expansion of Chinese ICBM missile silos to 400 plus is the last piece of the puzzle, designed to deter any American nuclear uses and close the avenue of Chinese military inferiority. We saw signs of escalation, with Chinese lethal aid and the new Russian-North Korean alliance.
6. Accelerating inflation would bring about a US debt crisis that would collapse the stock market and the dollar, which is also in line with our call for the collapse of the Doomsday Bubble. Conditions for this financial implosion are now accelerating for all to see as interest rates rise and bond issuance increases to the point of being unsustainable. In this regard, any dent in the perception that the US hegemony is collapsing through failed military intervention or escalating global conflict will accelerate the cost of UK debt and accelerate this dangerous situation. In effect, America is now trapped in a declining empire's debt doom loop. This was correct and is unfolding.
7. The banking crisis would see a third chapter led by Europe. When the bond market collapses as inflation surges, alongside wartime debt issuance, it is inevitable that this move will destroy the balance sheets of at least 50% of US banks (as they all hold 25% on long-dated bonds), making them bankrupt and an unprecedented banking crisis unavoidable. Stocks to watch are SocGen, DB, and Fifth Third Bancorp (see Watch out For The Next Leg Of The European  Banking Crisis and European Banks Ready For Next Lurch Lower). This is ongoing and will keep causing the yield curve to steepen even more severely. This has been the case, if not on slow burn, as bank stocks started to weaken just at the end of Q3. This was a quarter early.

4.0 MARKET PREDICTIONS AND ALPHA GENERATION

Over the quarter, we successfully followed our game plan, based on our predictions that:

1. The safe havens of Bitcoin, gold, and silver would rally strongly.
2. Energy prices would increase significantly, with oil targeting the $130.00 highs and ultimately $200-$250.
3. Commodities – food and base metals would also increase significantly, as explained in The Next Commodity Surge Has Commenced (blog post) and The Next Commodity Surge Into War Has Commenced (Arkent Scenario).
4. Inflation would increase significantly due to increased input prices, feeding into an accelerating wage cycle. Based on the previous K-wave cycle peak in 1975, US CPI could considerably exceed 16%.
5. Interest rates would keep rising and the cost of borrowing/mortgages will become exorbitant, absorbing household spending power, and reducing consumer spending. Based on the previous K-wave cycle peak in 1975, US Fed funds could exceed 22%.
6. Bonds would fall and not act as safe havens, driven by higher inflation and the massive bond issuance associated with the unfolding arms race/wartime spending programs. The medium term (next three months) out to the end of 2023 continues to see a risk of a wave 2 rally of some 10 points before the fall commences that could ultimately lead to US debt default. The debt projections from the US Budget Office say it all! Indeed, it is interesting to note that our prediction back in 2007, as shown in the lower diagram, that US debt would skyrocket in this phase of US decline, was correct, as issuance now exceeds the WW2 peak. As oil rallied, we recognised that there would not be a wave 2 and that The Bond Correction Looks to be Over as Oil Builds Momentum Higher. Also, that yield curves would steepen dramatically.
7. Equities would be the last to peak, supported by ever-accelerating money printing. We expect the Russell 2000 to stay weak, and NVIDIA’s high would signal that a reversal in the main indices was close at hand.

4.1 TOP 20 PERFORMING MARKETS OVER THE PAST 17 QUARTERS

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The top performing macro sector was silver over the Q2 2024 period, generating an excess of 257 trading units. However, bonds, which have been our top performers over the past five years, generated a second quarter of solid returns of 177 trade units. Gold platinum and EuroStoxx 509 all gave solid returns. Notably, our returns were positive across the main macro sectors, supporting our thesis for geopolitics and markets.

4.2 WORST 10 PERFORMING MARKETS OVER THE 17 QUARTERS

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The worst performing market within the quarter was the SP500 with four short trades in a row, generating a 160-point loss. Other markets were un-remarkable.

4.3 SPECIFIC MACRO SECTOR PERFORMANCE

4.3.1 EQUITY MARKETS – LOOKING FOR THE TREND REVERSAL

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US Equities remained in a bull market, hence they were not a productive sector except for the R2000. Meanwhile, European shorts generated good returns in the Eurostoxx 50, and neutral returns in Asia. 

4.3.2 FX MARKETS – IN CORRECTIVE MODE

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The FX sector was very much in corrective mode, creating mixed sector results and low Alpha.

 4.3.3 CRYPTO MARKETS CORRECTED

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Considering the huge Alpha capture last quarter, our losses within the ongoing correction have been minuscule.

4.3.4 BOND MARKETS – REMAIN EXPOSED TO DOWNSIDE 

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Bonds started their year on the highs in a super bullish model corresponding to being very long in the market. In contrast, we have been short ever since, generating excellent, consistent returns over both Q1 and Q2.

4.3.5 EM MARKETS – TAKING THE STRAIN

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The EM markets saw good returns as our shorts started to bear fruit as EM currencies gave way. The Brazilian Real and Peso were great examples.

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3.3.6 COMMODITY MARKETS – PRECIOUS METALS, NAT GAS, AND COPPER LEAD THE WAY HIGHER

Commodities have been in corrective mode over the quarter, with some key exceptions:

• Precious metals rallied strongly.
• Copper has been very bullish.
• Oil was struck on the range.
• Nat gas has been moving higher.
• Carbon emissions fell, in line with our shorts, to be very profitable.
• The agriculture sector produced small negative returns as it completed its correction.

5.0 ALPHA CAPTURE AND FUND PERFORMANCE

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This was a solid positive performance of 01.11% in a challenging quarter for our mining stocks as they failed to follow the underlying gold and silver prices higher. Note that our commodity fund was up 1.4% for the quarter.

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The Crypto Complex provided the best alpha generation in Q4, specifically Bitcoin and the Crypto 10 Index, as they rallied impulsively as part of our expected ultimate move to new highs. This particular trade captured a great tight low-risk entry point and then rand the trend to near the highs with a 17x return-to-risk profile.

Q1 2023 PERFORMANCE REVIEW CONTENTS

We recommend that subscribers to our Macro CIO's View take the time to read this analysis of our performance to enhance their understanding of how we consistently extract alpha from the markets, whilst minimising our downside risk on entry with extremely tight tactical stops, that are then actively managed as the trade moves in our favour.

1. Executive summary; Global Forecaster and Global Trader
2. Trade recommendation and risk methodology
3. Our key 2023 year-ahead geopolitical calls
4. Our main Q4 2023 geopolitical calls
5. Q4 2023 market predictions and performance
6. Alpha captures long-short fund performance.

1.0 EXECUTIVE SUMMARY

Our Global Forecaster geopolitical and market calls have once more proven accurate during Q3;

1. The Ukraine counter-offensive would see Putin under increased pressure
2. Inflation would keep moving higher, driving Bond prices (and equities) lower 
3. The Israeli War with Hamas will escalate 
4. Accelerating Inflation would bring a US debt Crisis ever closer
5. The Banking Crisis would see a third chapter. 

Global Trader covers seven macro sectors, with some 80-plus markets, and has been producing some exceptional alpha extraction since its inception in 2019.In summary, Q4 2023 could best be characterised as another period of low volatility consolidation and correction. Our capital preservation methodology has been a critical part of our risk performance, based on our ratchet risk-to-stop methodology (explained below).

1. Our best performance has come from the broad sector across cryptocurrencies the dollar and precious metals
2. The Worst performers were the Equity and bond sectors

2.0 TRADE RECOMMENDATIONS AND RISK METHODOLOGY

2.1 GLOBAL TRADER – DESIGNED FOR RISK-TAKERS

Global Forecaster was set up in the summer of 2019 to inform and advise professional asset managers through troubled waters. During that year, there were obvious indicators that global markets were soon to peak (in February 2020) and collapse, with the most grievous consequences. We have called this transition The Great Shift, as it is driven by the intersection of the peak of the K-wave cycle and the hegemonic challenge of China to America and the West.

We continually seek to quantify the accuracy of our trade recommendations as they translate into real-time market positions that are readily actionable by risk managers. We are pleased to report that the system we have used over the past three years (plus) has produced a very accurate representation of our market calls, in the direction, size and magnitude of the move. This has allowed risk-takers to quickly assess the accuracy of our past predictions in any market or sector, as well as benefit from our trade recommendations.

The structure of our trade recommendations allows our clients to apply them directly to their portfolios. Similarly, we go a stage further for some clients, by taking our trade recommendations and applying them to specific alpha-capture platforms with outstanding results. This service is available upon request.

2.2 GLOBAL TRADER METHODOLOGY AND STRATEGY

We now have 16 quarters of performance under our belt, and the results of our geopolitical predictions, market predictions and alpha-capture fund performances have been exceptional. We believe the key to high returns and long-term success is based on:

1. Prescient market views generated within a systematic multi-timeframe and price modelling system, which combines our geopolitical and market behavioural models.
2. Our strategy of trading is to seek alignment with long-term trends and then to find short-term entry points that translate into long-term time frames. Producing tight risk rewards on entry as well as high multiple-risk returns.
3. Our tight risk rewards on entry may mean that sometimes an entry point might require several attempts. A spreadsheet is available on request to explain all the trades that are displayed on the website and in the summary tables below.
4. Good trade entry points with tight and structurally meaningful stops (entered with contrarian price modelling).
5. Appropriate position sizing – to remind you of our methodology behind each trade recommendation; each real-time idea has a risk unit, defined from the entry point to the stop level, and a trade idea in one market can have a maximum of 200%, which equates to 20 risk units at any one time. Trade recommendations can be either 33.3%, 66.6%, 100%, 133%, 166% or 200%. The 200% limit in a market can be put on all at once or in combinations of sub-trades. High-conviction trades require the time frames of short, medium and long to all be aligned. Notably, since Q2 2021, the conviction levels have been and continue to be very high due to the strong integrated signal strength associated with our price and geopolitical models.
6. Ongoing trade management by following the progression of a trend. by lowering stops  where appropriate
7. Successful trade exit points that ideally replicate the dynamics of point 2 above, by precisely picking the end of the trend.

These key points describe Global Trader's risk methodology. By reading the below quarterly performance appraisal, you will have a better idea of how we apply our risk-allocation methodology, as well as how we combine geopolitical predictions using various models from Breaking The Code Of History. All of these real-time predictions have been published on the Global Forecaster website and are available to our clients.

3.0 OUR MAIN 2023 GEOPOLITICAL PREDICTIONS

3.1 2023 – THE YEAR TO TAKE COVER

Our main predictions for 2023 were outlined in a series of posts published in early January called The Year To Take Cover (as below). They have all been quietly building momentum, much like the forces of plate tectonics before releasing their energy in an earthquake. In May we described the period of Q1/Q2 as that of the Phoney Calm, as the geopolitical pressure builds like plate tectonics before releasing even as volatility fell in the markets.

Part 1 - Hegemonic Challenge Continues to Increase Global Entropy
Part 2 - Why We Named 2023 The Year to Take Cover
Part 3 - WW3; The Challenge to America's Hegemony and the Bifurcation of the World
Part 4 - Inflation Will Keep Rising
Part 5 - The Collapse of the Doomsday Bubble
Part 6 - Global Political Changes

3.2 GEOPOLITICAL PREDICTIONS  FOR  Q3 

As expected, the calm before the storm has been replaced by increasingly entropic war events, that have now manifested in Israel with Hamas' barbaric act of war. However, this is not an isolated event but one linked to the collapse of American hegemony, part of a global pattern of expected escalation into WW3.

One that ultimately involves China opening hostilities across the Asian basin, in the scenario we call Red Lightning. Thus we seem to be at the confluence of geopolitical and market events of a very significant magnitude, with an oil rally being the key market trigger. The specific areas that we highlighted for geopolitical risks in Q4 2023 are;

1. The Ukraine counter-offensive would see Putin under increased pressure. Both through the potential threat of the re-capture of Bakhmut and the renewal of the counteroffensive on the southern front once more/new NATO equipment arrives including F16s. This was a quarter early.
2. Inflation will keep moving higher, driving bond prices (and equities) lower and the yield curves to steepen as energy and commodities surge due to wartime resource constriction. In addition, we expect wage and input inflation to continue to move higher. Notably, we expect that commodity input inflation in the coming wave 3 will start to once more feedback into top-line inflation. See Inflation Expectations Are Increasing As Predicted. We were encouraged in our prediction by Andrew Bailey. Who at the lows of the oil price boldly insisted that Inflation was about to fall 'markedly', even as he signalled the Bank of England would have to keep raising interest rates. The Governor said that tumbling energy prices and cheaper food would help to drive down inflation for the rest of this year. AB is our favourite inflation reverse indicator, and it is no coincidence that he called for lower inflation this year at the oil lows. Just when we were predicting that commodity prices had completed their correction and would commence their next surge higher!!! At which point, in contrast, we correctly predicted the next commodity surge into war had commenced with the energy/commodity sector, which had started one of its biggest rallies in 56 years, into an expected peak in 2025-27. A peak that is all about resource constriction and escalating global conflict. This was a quarter early.
3. The Israeli war with Hamas would escalate to a regional war with Iran, sending oil prices through the roof and catalysing Xi’s war. As outlined in The New Age of War; Chapter 2: Israel and the Middle East and Dimensions of American Decline 10: Biden, Afghanistan, Ukraine and Now Israel and The Iranian/Hamas Trap Is About To Spring Shut On Israel and America. This was spot on in the real world but did not translate into market moves, as we expected, as the Biden administration did all it could to dampen the hard reality of a full-on regional war with Iran. A situation that could not last for long!
4. The Chinese demand gap would force Xi’s hand into war. In March 2020, Xi shifted his economy from a manufacturing export-driven nation into one that slowed its exports, collapsed its capitalist social camouflage, and stockpiled commodities on a massive scale as described in Red Peril 20; China's Increased Polarisation, Aggression and Bifurcation. The result is a demand gap that has seen the Chinese economy slow down significantly, compounded by numerous CCP economic decisions that do not make sense in peacetime – unless they represent a wholesale economic plan to prepare for a wartime economy that can survive total bifurcation from the West. This includes the lowering of US Bond holdings. The rapid borrowing by local governments has fostered an illusion of prosperity. However, China’s development model has been to issue a tremendous amount of loans to non-performing projects, particularly the housing industry, but now the housing market is collapsing, with dire consequences. The consequence is similar to that of the Nazi four-year plan instigated in March 1936, which meant that in preparing for war, the German economy would be bust by 1940, so had to use its military capability or implode. Xi is thus in the same position as Hitler was, where he either uses it or loses it. As we have regularly stated, dictators always warn what they are going to do, and liberal democracies always discount it as rhetoric, until they are attacked! In Xi's case his intentions are very clear, as we outlined in Red Peril 13 – Read My Lips: I Am Preparing China To Go To War. One only has to look at the recent changes to Chinese law, the economic strategy, and of course the military expansion, complete with the development and deployment of ballistic carrier-killing missiles and hypersonic missiles that can be deployed in massive waves to overcome all defenses, without warning. To cement the picture, the massive expansion of Chinese ICBM missile silos is the last piece of the puzzle, designed to deter any American nuclear uses and close the avenue of Chinese military inferiority. This was a quarter early.
5. Accelerating inflation would bring about a US debt crisis that would collapse the stock market and dollar. Which is also in line with our call for the collapse of the Doomsday Bubble. Conditions for this financial implosion are now accelerating for all to see as interest rates rise and bond issuance increases to the point of being unsustainable. In this regard, any dent in the perception that the US hegemony is collapsing, through failed military intervention, or escalating global conflict, will accelerate the cost of UK debt and accelerate this dangerous situation. In effect, America is now trapped in a declining empire's debt doom loop. This was a quarter early.
6. The banking crisis would see a third chapter. With the bond market collapse inevitable as inflation surges, alongside wartime debt issuance it is inevitable that this move will destroy the balance sheets of at least 50% of US banks (as they all hold 25% on long-dated bonds)  making them bankrupt an unprecedented banking crisis is unavoidable. Stocks to watch are SocGen, DB, and Fifth Third Bancorp. Watch out For The Next Leg Of The European  Banking Crisis and European Banks Ready For Next Lurch Lower. This is ongoing and will keep causing the yield curve to steepen even more severely. This has been the case, if not on slow burn as bank stocks started to weaken just at the end of Q3. This was a quarter early.

In summary, we saw a dampened market response to a significant escalation in Iran’s war on Israel 5; The Battle for the Sinai Sea Lanes that did not translate into markets in Q4 2023, but which we expect will do so in Q1 2024.

4.0 MARKET PREDICTIONS AND ALPHA GENERATION

Over the quarter we followed our game plan;

1. Energy prices would increase significantly, with oil targeting the $130.00 highs and ultimately $200-$250.
2. Commodities – food and base metals would also increase significantly, as explained in The Next Commodity Surge Has Commenced (blog post) and The Next Commodity Surge Into War Has Commenced (Arkent Scenario).
3. Inflation would increase significantly due to increased input prices, feeding into an accelerating wage cycle. Based on the previous K-wave cycle peak in 1975, US CPI could considerably exceed 16%.
4. Interest rates will keep rising and the cost of borrowing/mortgages will become exorbitant, absorbing household spending power, and reducing consumer spending. Based on the previous K-wave cycle peak in 1975, US Fed funds could exceed 22%.
5. Bonds would fall and not act as safe havens, driven by higher inflation and the massive bond issuance associated with the unfolding arms race/ wartime spending programs. The medium term (next three months) out to the end of 2023 continues to see a risk of a wave 2 rally of some 10 points before the fall commences that could ultimately lead to US debt default. The debt projections from the US Budget Office say it all! Indeed, it is interesting to note that our prediction back in 2007, as shown in the lower diagram, that US debt would skyrocket in this phase of US decline, was correct, as issuance now exceeds the WW2 peak. As oil rallied we recognised that there would not be a wave 2 and that The Bond Correction Looks to be Over as Oil Builds Momentum Higher and that yield curves would steepen dramatically.

4.1 TOP 20 PERFORMING MARKETS OVER THE PAST 39 MONTHS

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The top performing macro sector was Crypto, with an excess of 662 trading units, with very solid performances in precious metals and the Dollar's fall.

4.2 WORST 10 PERFORMING MARKETS OVER THE PAST 39 MONTHS

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The worst-performing sectors were equities and bonds, which both gave back running profits from Q3 trades. Individually Gilts had another tough quarter and oil for the first time gave back running profits. Meanwhile, the new products of US 30s and US 2s had a tough start, as did nickel, which looks to have been based but at a much lower level than we expected. Notably, wheat started a rally out of the table!

4.3 SPECIFIC MACRO SECTOR PERFORMANCE

4.3.1 Equity Markets – The Next Bear Decline Unfolds

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Equities were our best market sector in Q3 but among the worst in Q4 as equity markets rallied. Except the weakest US index in the form of the Russell 2000, and the China A50, which continue to provide positive returns.

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The FX sector was highly productive with a widespread capture of Dollar weakness, with Dollar Swiss being the best performer, generating 353 trade units.

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 4.3.3 Crypto Markets Coiling For A Rally

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We had excellent results in the Crypto 10 index, with a tight entry point with the Bitcoin trade, as shown below. 

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4.3.4 Bond Markets – The Next Phase of The Fall Commences

We spent most of the quarter being short and watching our profits from Q3 erode in a bounce that we discussed the potential of in Bonds Over Extended Or Accelerating Lower. The balance of judgment was that we expected the escalation in the battle of the Sinai Sea Ways to push up oil and inflation. But instead, the news from the Gulf's slow Houthi escalation was not enough to reverse the bond rally.

4.3.5 EM Markets – Zero Movement

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The EM markets saw a very quiet quarter with zero notable alpha-generating opportunities.

3.3.6 Commodity Markets – Oil Leads The Way Higher

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The Energy sub-sector fell back to the lows, eroding our Q3 profits.

However, Silver and Gold fell as the dollar rallied, lifting our Gold and Silver longs. Notably Gold outperformed Silver.

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The agriculture sector produced mixed returns, with wheat being the best performer.

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5.0 Alpha Capture and Fund Performance

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This was an incremental positive performance of 0.5% in a challenging quarter, when by the end of October we were up 6% but then gave back the profits. Note our commodity fund was up 1.4%.