the problem is, the historical analogies -- France 1989, or Volcker 1981 onwards -- are wack. Back then, trade unions had pricing power, and globalism was much weaker = weaker substitution effects, more powerful influence of inflation expectations. France had simultaneous high inflation and high unemployment. Today however, rising unemployment will kill labor's bargaining position. The bond market says demand destruction will lower energy prices and unemployment will kill labor quickly. I'm not arguing with the bond market.
I totally agree, and that’s why I am comparing todays rate to todays neutral rates (which are indeed much lower than the 1980s because of what you mentioned and more)
"When real yields decline, valuation intensive and risk sentiment driven asset classes generally tend to outperform.
That's because the marginal inflation-adjusted return for owning cash USDs (risk-free real yields) becomes less attractive and the (real) discounting rate for long-term cash flows becomes much less punitive.
Hence, the incentive to chase risk assets is larger - actually, following this narrative one could argue ‘‘the riskier the better’’.
This is why I follow you - you explain why the average person who may not invest in bonds should care about what the bond market is doing. You connect the dots to risk assets. You even clarify/summarize what your podcast guests are saying in a more understandable way for laypeople. Fantastic! I don't know of any other macro analyst who does that.
Hi Alf, thank you very much for sharing the analysis with us. Just wondering, how do you calculate the 5yr forward, 5yr real yield? I can find the USD I25 FORWARD RATE 5Y5Y on BBG terminal, but which inflation figure do you use to arrive at the real yield? Thanks a million!
the problem is, the historical analogies -- France 1989, or Volcker 1981 onwards -- are wack. Back then, trade unions had pricing power, and globalism was much weaker = weaker substitution effects, more powerful influence of inflation expectations. France had simultaneous high inflation and high unemployment. Today however, rising unemployment will kill labor's bargaining position. The bond market says demand destruction will lower energy prices and unemployment will kill labor quickly. I'm not arguing with the bond market.
I totally agree, and that’s why I am comparing todays rate to todays neutral rates (which are indeed much lower than the 1980s because of what you mentioned and more)
Thanks for this clear and concise analysis 👌
Welcome, Christoph!
Thank you so much for this update Alf!
Welcome!
Great article thank you for sharing! Love the positive outlook.
My pleasure, Matt!
"When real yields decline, valuation intensive and risk sentiment driven asset classes generally tend to outperform.
That's because the marginal inflation-adjusted return for owning cash USDs (risk-free real yields) becomes less attractive and the (real) discounting rate for long-term cash flows becomes much less punitive.
Hence, the incentive to chase risk assets is larger - actually, following this narrative one could argue ‘‘the riskier the better’’.
This is why I follow you - you explain why the average person who may not invest in bonds should care about what the bond market is doing. You connect the dots to risk assets. You even clarify/summarize what your podcast guests are saying in a more understandable way for laypeople. Fantastic! I don't know of any other macro analyst who does that.
I just subscribed to Macro Compass and tweeted my appreciation for your work: https://twitter.com/4PFinance/status/1553116317330198528?s=20&t=78MtDdnkjJ_PVWAffxJ-4g
Thanks, Emma. Very kind and nice endorsement
Hi Alf, thank you very much for sharing the analysis with us. Just wondering, how do you calculate the 5yr forward, 5yr real yield? I can find the USD I25 FORWARD RATE 5Y5Y on BBG terminal, but which inflation figure do you use to arrive at the real yield? Thanks a million!
You’d have to do 5y5y OIS swaps minus 5y5y inflation swaps. And then adjust the latter by the CPI/PCE wedge (say -0.40 as an adjustment)
Thanks Alf. But what is the CPI/PCE wedge? What does that mean?
I’d also like to know where to find or calculate on the terminal.
Thanks for the post
Welcome, Radu
As usual, excellent.
Very kind
Best analysis yet!
Thank you!
Thanks a lot for your analysis Alf. Always clear and concise👏🙏
My pleasure, Jesper!
Thanks for a very clear and concise overview, showing in-depth understanding of the markets. Cheers!
Welcome!
A well reasoned thorough analysis. Thanks!
Glad you enjoyed it, Jeffrey!
Thank you Alf. I appreciate that you share your knowledge.
My pleasure!
Well done Alf... as always!
Thank you!
Very insightful. Picking up on the subtleties in a useful way. Thank you for sharing your work!
Glad you enjoyed it!
Great update. Thank you, Alf!!
Welcome!