“Liquidity and truth-telling:” Andreas Steno discusses his approach to macro analysis

Andreas Steno is the founder of Steno Research and co-host of the popular podcast The Macro Trading Floor. In this episode of Opto Sessions, Steno runs through his macro framework, including three parameters his research team uses to determine the prevailing macro regime, and explains why he’s currently “decently upbeat, despite all of the recession chatter out there”.

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A free agent in the field

For Steno, what differentiates the approach of his research team from that of their peers is that “we don't have any filter; we don't have any politics that we need to consider”.

In his former role as chief strategist of global coverage at Nordea, one of northern Europe’s largest banks, Steno “needed to navigate a lot of politics”. By contrast, as the founder of Steno Research, he is able simply to follow the trends that his research guides him to without any bureaucratic or political constraints.

He brings this ethos to another one of his current roles, that of co-host of The Macro Trading Floor. Whereas a lot of strategists struggle when it comes to “making content on macroeconomics palatable for the broader audience”, Steno says, “I try to be a bit more jovial”. The podcast’s success is in part attributable to Steno’s fun and fresh approach.

“Liquidity and truth-telling”

At Steno Research, he and his team aim to “tell the truth as we see it”.

A key challenge is that “the world of finance is decentralized to an extent that we never thought possible, and therefore it is much more tricky to figure out what actually drives prices in real time”. In this light, Steno has found structural liquidity to be one of the most important measures. The twin pillars of his approach can thus be summarized as “liquidity and truth-telling”.

The leading indicators Steno uses to predict inflation depend on the time horizon. For a short-term outlook, he often turns to surveys asking companies for their price plans, and the best among those is the National Federation of Independent Business’ Small Business Survey, which asks SMEs whether they plan to hike their prices. Currently, around 20% of SMEs say they are going to – but Steno thinks this will equate to roughly 2-3% inflation. If the figure is 50% or over, however, then that would be “something to worry about”.

For a longer-term outlook, Steno looks at the Chinese credit cycle, which he sees as “the leading indicator for inflation in the West with one to two years of lead”.

Over the last quarter and into 2023, there’s been an uptick in lending in China, paralleling the reopening of the country’s economy. Steno thinks that this serves as an advance warning of inflation hitting the western world in 2024.

The Steno Signals macro regime

What Steno calls his “little macro research shop” follows three parameters in determining which macro regime is currently governing markets.

Firstly, they look at structural liquidity, usually in the form of bank reserves, “in each and every currency across the major geographies worldwide”. Over the past 18-24 months, structural liquidity “has been the driver of global asset allocation”.

Next, Steno’s research team checks whether inflation is accelerating or decelerating on a month-over-month basis. Lastly, they look at growth through the lens of something like the Purchasing Managers' Index or the Consumer Price Index.

Combining readings of those three parameters determines which macro regime is governing markets at any given moment.

January was a great example of the “Gung ho macro regime”, which Steno defines as the best possible combination of these three parameters: “structural liquidity going up, inflation going down and growth going up”.

In total, Steno Research has identified eight macro regimes, but Steno himself admits that it's impossible to create an exhaustive list of possibilities due to the abundance of variables. He also admits that this framework would have “told you to do everything that you shouldn't do” after Putin invaded Ukraine and thus requires human intervention to rule out geopolitical influences.

The upcoming “weird cocktail”

The International Monetary Fund (IMF) has predicted 6.6% inflation this year and 4.4% for 2024. Steno disagrees on both counts.

“It's typically a good idea to bet against the IMF. And one of the reasons why I have that view is that it's probably the most political organisation that I can think of within the field of macroeconomics. It takes a long while to turn around such a supertanker”, he says. And, just as they were late in calling inflation, they’ll be late in calling the “disinflationary wave” that Steno believes has already started.

Steno sees “convincing evidence that wage growth has peaked”: “Everything in the service sector is very wage dependent. And as soon as we get the first signs of abating wage growth, it should spill over to service inflation more or less immediately.”

Service and commodities inflation is waning. It’s “simple math”: the spike in inflation at the beginning of the invasion of Ukraine will be impossible to beat year-over-year. Until the end of April, he says, the Fed will need to bring down its cash reserves, as it is not allowed to hold a lot of cash while the US debt ceiling is being enforced.

“Ultimately,” says Steno, “we’ll be on the receiving end of this liquidity from the US Treasury” because “when the Treasury draws down on their account, private banks will receive it”.

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