The guest commentary below was written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye.

The world equity markets ended November with their biggest monthly rally in three years. Optimism comes from better-than-expected inflation figures, expectations of central bank rate cuts, and general acceptance that earnings and economic growth will be weak but acceptable in 2024.

The main challenge for investors in 2024 is to confirm these hopes as trends.

The first problem is believing that inflation will drop magically without any significant impact on growth and ignoring monetary aggregates.

Inflation is falling due to the significant decline in money growth, and this means an abrupt slump in liquidity, a weaker economy, and financial conditions worsening.

Daniel Lacalle: The Main Challenge for Investors in 2024 - 01.20.2021 inflation cartoon

Broad money (M3) growth is down 0.9% in the United States in the year to September, according to data compiled by the Institute of International Monetary Research. In the euro area, broad money growth was -1.0%, according to the ECB.

The United States will need to refinance $7 trillion of maturities in a declining broad money economy, and this means a massive vacuum effect, a giant liquidity drain that hardly justifies multiple expansions and bullish sentiment.

Market participants cannot expect the Federal Reserve to implement massive rate cuts and even a quantitative easing program in the middle of an election year. Furthermore, even if the Fed cuts rates, the impact is likely to be negligible compared to a $7-$10 trillion liquidity drain, which is the equivalent of the refinancing required by the U.S. and other major governments in 2024.

Trusting in multiple expansions is concerning because, in order to achieve that, markets would need to count on rising liquidity, not a reduction.

In a scenario of liquidity drain, investors need to go back to fundamentals and pick the stocks that will keep margins and growth in a weak economy, but not bet on multiple expansion.

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This is a Hedgeye guest contributor piece written by Daniel Lacalle and reposted from his website. Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap." Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE. View all posts by Lacalle on his website. 

Twitter handle: @dlacalle_IA

LinkedIn: Daniel Lacalle