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.