Economic Factors Influencing Investment

1st Time Ever, CLO Market For the first time ever in the history of the U.S. CLO market an interesting dynamic has emerged. CLO new issue volume is at a record levels, YET the size of the CLO market has declined. This table below illustrates 10-years of history; however, one can go all the way back to 1990 (first CLO ever issued) to see that this is indeed a first. Negative net issuance despite record primary issue occurred as seasoned/older CLOs that are past their reinvestment period are amortizing or being liquidated, either into the open market (BWIC) or used to form new CLO from the same manager. Demand for CLO tranches starts with the AAA tranche since it is ~60% of the capital structure. AAA demand is rock solid, led by large U.S. & Japanese banks, global insurance companies, and the new kid on the block: Janus’ CLO ETF (JAAA) which has grown to $10B, creating an additional bid for AAAs. As a result, CLO liabilities have tightened, which is accretive for CLO equity investors. CLO managers employ teams of investment professionals that are experts in underwriting each BSL, building and managing a highly diversified portfolio with an enduring credit profile to maintain low default rates, and avoiding CCCs, a bifurcation that drives default rates. Cash flow distributions to CLO equity investors benefit from tighter CLO liabilities, the return generated during the warehouse period as the CLO ramps, +reinvestment during the investment period, +active management that adds alpha via relative value generated by CLO manager, +repricing and extensions of CLO liabilities later in the CLO life span. Today, CLO equity holders are earning their highest cash distribution in years, resulting in mid-teens IRRs, strong DPI and MOICs. I believe this dynamic will continue to be net-positive for world-class CLO managers, who have proven incredibly adept managing through the cycles. The kicker is when the CLO manager shares a portion (10-20%) of its management fees that it earns from managing the CLO (~40 bps) with the CLO equity holders. This fee sharing arrangement was first introduced post-GFC when CLO managers raised CLO equity funds required under risk-retention requirements known as The Volcker Rule. Since the Volker rule is no longer applied to U.S. CLOs, fee sharing arrangements are less prevalent today, but available from select managers. Conclusion: The technical condition that exists today, with tight liabilities and net-negative primary issuance, yet robust new issue supply and improving credit dynamics represents a unique opportunity for CLO equity.

Use this simple approach to master the Bond Market. Nominal bond yields can be thought of as the interaction between: 1️⃣ Growth expectations 2️⃣ Inflation expectations 3️⃣ Term premium 1. Growth expectations When it comes to economic growth we must consider two angles: structural and cyclical growth. Structural economic growth can be generated through more people joining the labor force (good demographics) and/or through a more productive use of labor and capital (strong productivity trends). The ability of an economy to generate structural growth is an important driver behind long-dated bond yields (strong structural growth = structurally higher long-dated yields and vice versa). Short-term economic cycles also matter for bond yields and particularly at the short-end. Cyclical growth trends are driven by the credit cycle, the fiscal stance, earnings growth, labor market trends and more - the healthier they are, the higher short-end bond yields can be pushed also as a result of a likely tightening from Central Banks that might grow worried about economic over-heating and inflationary pressures in such an environment. 2. Inflation expectations The second component driving nominal bond yields is inflation: but NOT TODAY'S inflation - instead we are referring to long-term inflation expectations. Central Banks might temporarily react to concentrated bursts of inflationary pressures by raising short-term interest rates but when it comes to long-dated bond yields investors will always pay close attention to inflation expectations. That's because consumers and borrowers will tend to make important decisions based on these rather than on volatile short-term trends in inflation. 3. Term premium An investor looking to get fixed income exposure can do that via buying 3-month T-Bills and rolling them each time they mature for the next 10 years. Alternatively, it can decide to purchase 10-year Treasuries today. What's the difference? Interest rate risk! Buying a 10-year bond today rather than rolling T-Bills for the next 10 years exposes investors to risks – term premium compensates for this risk. The lower the uncertainty about growth and inflation down the road, the lower the term premium and vice versa. 💡 The Main Takeaway 💡 If you want to make sense of bond yields, a useful approach to use is to think of them as the result of growth expectations, inflation expectations and term premium. P.S. If you liked this post you'll love my macro research. I share my macro analysis every day with the biggest institutional investors and hedge funds in the world. Get your FREE trial here👇🏼 https://lnkd.in/dyFFJp-z

CLOs becoming a victim of their own success? 🥹 I used to be a big buyer of CLO tranches back in the 2000s. An asset class I am super familiar with and which I like to follow for the opportunity set that CLO equity funds represent. Bloomberg is highlighting an interesting, somewhat disconcerting trend in CLO land which warrants a closer look 👀 in my view: "The $1.3 trillion CLO market is about to become a victim of its own success because managers can’t create the bonds fast enough to meet demand and are running out of things to buy. A slowdown in M&A after borrowing costs rose is continuing to deprive the lenders of the leveraged loans that the industry was built on. About $311 billion of M&A deals have been announced and completed so far this year, roughly $1 trillion below the same level two years ago when interest rates began to rise. 💡That may soon end up impacting the equity arbitrage which may hurt new issuance in the coming months. It’s also sent more managers into the secondary market, where about 60% of loans now trade above par, making it that much harder to find bargains to put together a portfolio. 💼 'There’s too much demand for CLO bonds and too little loan supply. CLO managers can’t keep up much longer,' said Pratik Gupta, who leads CLO research at Bank of America. Demand for the safest CLO tranches soared this year after an influx of money into ETF. Banks have also been piling into the AAA bonds, and some Japanese 🇯🇵 institutions may scoop up more of the debt. On top of that, Bank of America estimates that about $64 billion of the debt has been paid back so far this year, including amortizations and called CLOs, meaning asset owners have more capital to put to work. 'If you’re an existing investor, you’re getting so much money in the door that’s creating demand in and of itself,' said Amir Vardi, an MD at UBS Asset Management. 'Forget about increasing the budget to get more,' he said on a panel. 'You’re just trying to keep what you have invested.' Demand is so strong that even an 86% increase so far this year in US sales of new issue CLO bonds from the same period in 2023 hasn’t been enough to sate investors’ appetite. As a result, spreads on the AAA debt have compressed by more than 100 basis points over the benchmark since late 2022. ⚠️ Lenders are also trying to circumvent the dearth of paper by increasing their holdings of corporate bonds — both investment-grade and junk — in an attempt to preserve arbitrage returns, Gupta said. The rise of private credit is also crimping opportunities for leveraged loan lenders by winning business from them. 'The supply and demand balance is out of whack, it’s become more difficult to find assets at attractive levels,' said Christina O’Hearn, PM for the leveraged loan and CLO business at Pretium Partners. 'We expect to see continued refi & reset activity but not as many new issue CLOs.'" (+++Opinions are my own. Not investment advice. Do your own research.+++)

Why do currencies really move? Not because of rates. Because of gravity. In the FX market, linearity does not exist. Currencies do not follow the neat equations of econometric models, nor do they obediently track interest rate differentials as textbooks suggest. FX is a complex ecosystem shaped by flows, trust, narrative pressure, fear, and central bank intervention. All of this forms an informational field that bends and shifts over time — much like a gravitational field. Currency Gravity Field™, The Quantis Model We have built the Currency Gravity Field™ for global institutional operators, a physical model that represents currency dynamics as a system immersed in an informational gravitational field, where flows respond not merely to price variables but to the overall energetic configuration of the system. In this framework, price is not the primary variable. Instead, we analyze: -the marginal reallocation of global liquidity and its directional bias; -the compression or expansion of carry as a form of potential energy within the system; -the deformation of the trust field, understood as perceived coherence between macro narrative, policy stance, and structural fundamentals; -the erosion of a country’s informational energy, detectable through discontinuities in flows, forwards, and institutional positioning; -the emergence of critical conditions that precede the failure of a currency regime or a peg. These gradients generate genuine zones of attraction- typical of safe‑haven currencies or economies with surplus systemic trust and zones of repulsion, characteristic of structurally fragile currencies, stressed regimes, and carry structures approaching unwind. Dynamically, currency flows do not move along linear symmetries. They follow the gradient of the informational field, sliding toward minima of potential exactly as a mass would under gravity. This demonstrative model visualizes how currency flows evolve within a dynamic informational field. The surface captures variations in informational pressure, while the highlighted instability zone and flow vectors show how capital trajectories naturally converge or diverge depending on the structure of the field. This approach provides a physics-based view of FX risk, beyond traditional econometric models. This is not statistics. It is the physics of complex systems applied to FX.

Critical minerals are no longer simply natural resources. They are becoming strategic infrastructure. As industries accelerate investment in AI, advanced manufacturing, electrification, semiconductors, and next-generation technologies, access to critical minerals is emerging as a defining component of long-term competitiveness. Mineral reserves do not automatically translate into economic advantage. Extraction capacity, processing capability, infrastructure, investment, governance, and resilient supply chains all influence how those resources create value. For business leaders, this extends well beyond the mining sector.  Many organizations now operate in industries that depend on supply chains built around materials they neither produce nor directly control. Understanding where critical resources originate—and how those ecosystems evolve—is an essential element of long-term strategy and operational resilience. Competitive advantage is increasingly shaped not only by innovation, but by the ability to secure the capabilities and resources that make innovation possible.

On the face of it, today's June #payrolls report was an upside surprise. #Jobs added reached 206k, higher than expected and average hourly #earnings (wages) were up 0.3% month on month or 3.9% year on year – hardly tame. But underneath the hood, it’s clear to us that the #LaborMarket is on a plateau. April and May jobs numbers were revised down by more than 50k each. The #unemployment rate continued its slow and steady tick higher. A large majority of jobs created in June were in non-cyclical sectors such as government and medical care. Importantly, cyclical job creation (i.e. retail, business services) moved lower, suggesting that upward wage pressure may ease ahead. After two years of focusing on #inflation, the #Fed is talking more about the labor market and has acknowledged that any unexpected labor market weakness could prompt them to cut sooner. What we’re seeing today is not an unexpected weakness in the labor market – everything is still fine. And though there’s still next week’s CPI print to look forward to, data since the Fed’s last meeting likely has not provided enough evidence for a cut in July. We look for a first cut in September. As for the market: so far, #investors have taken moderating activity as good news. In other words, declining #InterestRate risk has been more important than any rise in #recession risk. It’s our view that the #equity market can continue to grind higher until more pronounced signs of slowdown appear. You’ve heard us say this before, but it bears repeating: the labor market is not a leading indicator. Jobs data is critical for understanding Fed policy, but it tells us much more about where we are today than about where we may be in the future. We are staying hyper-focused on transition indicators and on portfolio balance as a result. What does that mean? A benign economic backdrop is unambiguously good news, but it can be frustrating for investors who have felt “stuck” in the current environment – and with the same portfolio strategy implications – for more than a year. We agree that the U.S. economy has been on a plateau – but it’s one laden with investor opportunity in our view. For investors who can be tactical, we believe it makes sense to stay fully invested until clearer signs of slowdown occur. Our two key indicators are consistent increases in U.S. jobless claims and a deterioration in corporate earnings expectations. Neither are happening in a meaningful way – yet. That said, there is far more that a benign #economic and #credit backdrop can do for investors. Those concerned about equity valuations can consider taking equity-like risk in high yield credit, where carry is more attractive. They can use small and mid-cap growth companies and #infrastructure equity to rebalance equity risk towards structural themes (i.e. digitization, electrification). They can also consider leveraging diverging economic cycles to add international equity exposure. 

In modern #defensetechnology—from F‑35 fighter jets and Arleigh Burke destroyers to Virginia‑class submarines—rare earth elements like #neodymium (Nd), #praseodymium (Pr), #samarium (Sm), #dysprosium (Dy), #terbium (Tb), #lanthanum (La), #gadolinium (Gd), and #yttrium (Y) are absolutely critical. These elements enable high-performance magnets, precision guidance systems, radar arrays, lasers, and more—components at the heart of U.S. military superiority. Yet today, China remains the dominant global producer, accounting for around 270,000 metric tons—nearly six times the U.S. output (~45,000 metric tons). Worse still, #China controls ~90% of processing and refining capacity—and continues to exert strategic leverage through export restrictions. Here’s what the U.S. is doing to change that: • Moutain Pass Mine (California) – Operated by MP Materials it’s the only rare earth mine in the U.S., supplying elements like neodymium, praseodymium, lanthanum, and cerium. • Brook Mine (Wyoming) – Developed by Ramaco Resources, Inc., this site holds a vast deposit—including Nd, Pr, Sm, Dy, Tb—and represents the first new rare earth mine in the U.S. in 70 years. • Round Top Project (Texas) – A heavy rare earth element (HREE) deposit with unprecedented scale—housing 16 of the 17 rare earths—including all of our spotlights. Though not yet operational, it’s a critical candidate for future supply. While the U.S. works to develop these domestic sources, China still leads the world in the mining, refining, and magnet manufacturing supply chain . That dominance poses a direct strategic vulnerability. What’s changing? • The Pentagon has invested hundreds of millions into MP Materials—including a $400M stake and support for a 10,000‑ton magnet manufacturing facility—to build domestic capacity and break China’s stranglehold. • The Brook Mine is primed to deliver a fresh U.S. source of critical rare earths, injecting resilience into our defense supply chain. ⸻ ** Why This Matters:** 1. National Security – Rare earths are foundational to modern defense systems. Without secure, reliable access, U.S. military readiness is at risk. 2. Supply Chain Resilience – Reducing reliance on a single foreign source—especially one that can weaponize its market dominance—is non-negotiable. 3. Strategic Sovereignty – Investment in Mountain Pass, Brook Mine, and Round Top empowers the U.S. to produce and refine what it needs, here at home. ⸻ #RareEarth #CriticalMinerals #DefenseIndustry #SupplyChainResilience #USMining #MPMaterials #BrookMine #RoundTop #NationalSecurity #Neodymium #Praseodymium #Samarium #Dysprosium #Terbium #Lanthanum #Gadolinium #Yttrium

Mixed Economic Data Points to Bumpy Road Ahead Nearly all economic data released Wednesday came in either above or below expectations, underscoring how difficult it has become for markets to assess the real-time impact of tariffs. • Trade deficit widens due to falling exports. • GDP Q1 revised down to -0.5% from 0.2% because of consumption. • Solid durable goods spending, a proxy for private business investment. • Initial jobless claims fell yet continuing claims rose again. 🔄 Much of the volatility likely stems from the rapid shifts in trade policy during May. After a weak April, marked by a pullback in spending and investment, May data showed a solid rebound—likely driven by the temporary 90-day pause in reciprocal tariffs. ❓ Still, it remains unclear whether that rebound reflects another round of front-loading ahead of potential tariff hikes or simply a partial recovery from April’s weakness. The rise in the goods trade deficit and in durable goods orders and shipments may also be tied to higher import prices, adding further noise to the picture. That’s why we view May’s data as less indicative of underlying momentum and more reflective of temporary distortions. 🧾 One data point, however, has remained consistent with our forecasts: continuing jobless claims. In an environment marked by uncertainty, businesses appear reluctant to expand, limiting opportunities for unemployed workers and new graduates. Alongside other signs of a softer labor market, this points to a gradual uptick in the unemployment rate in the months ahead. 🌍 Looking forward, expect more volatility in June from geopolitical tensions and in July when the tariff pause expires. Should additional signs emerge that tariffs are weighing on the economy, the odds of a rate cut later this year—or as early as September—will rise sharply. But if growth continues to defy the drag from tariffs and inflation edges higher, the case for rate cuts could weaken considerably.

◾ The recent solid jobs report emphasized the ongoing resilience in hard economic data. Nonfarm payrolls increased by 139k in May and the unemployment rate remained at 4.2%. However, while hard economic data has held up so far, we expect the reports to soften over the coming months. ◾ Rotations within the equity market suggest investors are pricing an optimistic growth outlook. The performance of Cyclicals vs. Defensives reflects a roughly 2% US real GDP growth environment. Goldman Sachs economists expect forward four-quarter real GDP growth to equal roughly 1%. ◾ Many clients have raised concerns over risks to the market rally and the market's pricing of growth ahead of weaker growth data. We see three reasons to discount the anticipated headwinds. ◾ First, soft economic data have already weakened and typically trough before the hard data. S&P 500 returns are currently more correlated with soft data than hard data. If the recovery in soft data is sustained, it should support equity returns even as hard data weaken. ◾ Second, investors may be looking through the near-term weakness and out to 2026. Goldman Sachs economists forecast real US GDP will slow to 0.4% on a Q/Q annualized basis in 4Q 2025 but rebound to 2.0% by 4Q 2026. ◾ Third, our sector-neutral baskets of economically sensitive stocks appear to imply a slightly less optimistic growth outlook than the Cyclicals vs. Defensives pair. The median High Operating Leverage (GSTHOPHI) stock trades near a record valuation discount to the median Low Operating Leverage (GSTHOPLO) stock. We rebalance our Dual Beta basket (GSTHBETA), GSTHOPHI, and GSTHOPLO in this report. ◾ We see both upside and downside risks to the market's pricing of economic growth. A significant deterioration in economic data may challenge the ability of investors to look through near-term weakness. In contrast, there is room for further improvement in soft data, which would support continued upside for equities.

Uncertainty in manufacturing is now the operating environment. Cotton prices fluctuate sharply, export demand shifts without warning, climate events interrupt supply chains and geopolitical decisions can alter cost structures overnight. We have seen how quickly sentiment can change from expansion mode to survival thinking after a single policy announcement. That is the landscape leaders navigate today. The larger risk lies in rigidity and overdependence. When a business is built around one product, one geography or one dominant customer, volatility hits harder. Diversification therefore becomes a stability strategy as much as a growth strategy. Broader markets, flexible production systems and a balanced customer portfolio create resilience that spreadsheets alone cannot deliver. The critical lever within our control is response. Agility must be embedded into systems and culture, enabling teams to rebalance production lines, explore alternate markets and adjust sourcing strategies with speed. Preparedness requires scenario planning and financial discipline so decisions remain measured even during turbulence. Periods of disruption often redistribute opportunity. When some players pause, others step forward. Market share shifts toward those who act with clarity and conviction. Boldness in manufacturing is about calculated action. It is about investing in flexibility, strengthening partnerships and committing to long-term capability even when the short-term outlook feels uncertain. Global examples show how conviction during volatile cycles can redefine industries, and Indian entrepreneurs have repeatedly demonstrated resilience through policy shifts, currency swings and competitive pressures. Volatility will continue, but manufacturers who stay calm, diversified, responsive and forward looking will convert uncertainty into strategic advantage. #Manufacturing #SupplyChain #BusinessStrategy #Leadership #Industry