Inflation, growth, profits, energy supply. So many uncertainties today.

One definite macroeconomic fact is the US monetary policy. The Fed will take a new trajectory on its balance sheet in a few weeks, for months and potentially years: A sustained contraction of a trillion USD per year.

This is a first in world monetary history.


Two macro factors – one economic and the other monetary – have each historically weighed on stocks multiples. These are inflation and the contraction of liquidity. The combination of the two factors today puts equity markets in serious danger.

What should central bankers do, stop contracting at the risk of runaway inflation? Continue contracting at the risk of a market crash?


To hunt game, you must first track it on the trail. The same is true for the offshore dollar.

Since 2014, we lost track of our wild dollar with increasing perplexity. Not by a single dollar, but a trillion dollars. In this letter, we show how wild dollars escaped from the FED trap and are now nesting on the high branches… of the US stock market!

A ‘Giffen good’ is a strangeness. When its price increases, its demand does not fall, it rises. Simply because it is an essential good – not substitutable – which  constitutes a significant part of the buyer’s income.

In times of economic stress, companies that produce Giffen goods are a safe-haven for the stock market investor.

We are now in a time of economic stress; here is an example of the Giffen portfolio, with seven good old essential stocks!

Our previous publication, “The Four Monetary Quadrants,” revealed how the volume and price of money deeply influences asset allocation.  We now shift gears to the transition between one quadrant and another. Specifically, how to collapse model risk, select asset classes, and still sleep well at night.

Start by clearing out the dead wood!

Back in the late 70s, Charles Gave realized asset classes are very sensitive to two major macro variables: growth and inflation. Thus, he suggested a Four Quadrants’ framework for portfolio construction: inflationary boom, inflationary bust, disinflationary boom and disinflationary bust.

Here, we propose to mirror the concept, crossing volume and price, but from the monetary angle: the amount of liquidity vs. the remuneration of such liquidity.

A new “Quadrants’ representation” emerges to drive asset reallocations.

The Gavekal TrackMacro model combines seven fundamental macroeconomic rules to provide equity risk-on or risk-off signals in 40 countries. One of these, the USD liquidity rule, measures the growth of USD availability in the world in real terms. It turned positive at the end of March 2020, for the first time since December 2017. The dollar shortage is over. It is time to overweight emerging markets.