Hello Alf, First of all thanks for writing another valuable article :).
If previous iteration of 'don't fight the fed' actually meant 'valuation seems to be a bit crazy across the market, but fed is printing and will do more printing if things go into wrong direction so buy anyway'. What would be then ideal long strategy for' 2022 don't fight the (this time angry and tapering') fed?
It seems to be that equities are in general doomed for bad performance - growth with high multiples because of DCF re calibration, value equities because of (often) increased debt servicing costs.
Real estate will definitely suffer from higher yield environment,
Gold/Silver would be an interesting choice for stagflation scenario but I am not sure what's the case for upcoming year of tightening. I also don't see any extra upside in long TLT.
I see however few interesting opportunities for speculation:
* Short All the unprofitable tech zombies
* Short home builders equities?
* Curve flattening instruments (one you already play)
* Short copper/industrial metals
* Long China - already super negative sentiment + still room for credit impulse growth.
* Long Brazil - healthy positive interest rates, upcoming elections, high exposure on energy/agriculture commodities
* Short on particular European markets exposed to Russian bonds
How do you think about the coming de-globalisation era and thus potential increase in labour market participation as western developed nation cannot just push all labour intensive work to cheaper countries?
Hi Alf. Great article. Also great interview with Adam Taggart. Quick question. On your spreadsheet of positions, you reference monthly vol. Where are you obtaining this number? Realized or implied volatility? Thanks for any help.
Great work Alf. Quick one: I've seen the St. Louis Fed publish 10yr Inflation Expectations. But can seem to find your index for 30y US PCE inflation expectations. Is this published? Or a variable you have constructed yourself?
Great work, Alf. Appreciate your insight as always. FWIW - ETH statistically backtests as a better short with the coming macro environment instead of BTC
Just one question, why do you think that this is an environment where equity risk premium needs to be repriced higher? As opposed to what is reflected in the distribution mean, 5.5?
How does one think about mortgage rates in this environment? Rising interest rates mean variable rates will increase 0.25% * the number of rate hikes, but fixed rates already have 3-4 fed hikes baked in. Thanks for your thoughts.
Hi Alf. I am having trouble using your "1 sigma" stops to determine appropriate position sizes. Suppose I want to allocate (hypothetically) $100,000 in total to your portfolio. So for the short IWM my stop should be 7% away and that should correspond to 2% of my total capital, therefore the amount of IWM that I should be short would be 100000 x 2 / 7 = $28571. Similarly the amount of HYG that I should be short would be 100000 x 2 / 3 = $66667. Is that correct? Because those two positions alone then seem to be a very large fraction of my total funds, leaving very little to allocate to other positions.
Beyond the messaging to markets, is there a political component to this? My thought: Powell still hasn't been confirmed by the Senate. With all the crises du jour from the Ukraine, possible COVID increases, et. al., Powell may not get confirmed before November And if the Republicans take the Senate, is he more likely to get confirmed eventually by looking more hawkish?
The best post-Fed analysis I have seen.
Hello Alf, First of all thanks for writing another valuable article :).
If previous iteration of 'don't fight the fed' actually meant 'valuation seems to be a bit crazy across the market, but fed is printing and will do more printing if things go into wrong direction so buy anyway'. What would be then ideal long strategy for' 2022 don't fight the (this time angry and tapering') fed?
It seems to be that equities are in general doomed for bad performance - growth with high multiples because of DCF re calibration, value equities because of (often) increased debt servicing costs.
Real estate will definitely suffer from higher yield environment,
Gold/Silver would be an interesting choice for stagflation scenario but I am not sure what's the case for upcoming year of tightening. I also don't see any extra upside in long TLT.
I see however few interesting opportunities for speculation:
* Short All the unprofitable tech zombies
* Short home builders equities?
* Curve flattening instruments (one you already play)
* Short copper/industrial metals
* Long China - already super negative sentiment + still room for credit impulse growth.
* Long Brazil - healthy positive interest rates, upcoming elections, high exposure on energy/agriculture commodities
* Short on particular European markets exposed to Russian bonds
Cheers,
Hi Alf
Superb article
How do you think about the coming de-globalisation era and thus potential increase in labour market participation as western developed nation cannot just push all labour intensive work to cheaper countries?
That would then bring real GDP growth back?
Hi Alf. Great article. Also great interview with Adam Taggart. Quick question. On your spreadsheet of positions, you reference monthly vol. Where are you obtaining this number? Realized or implied volatility? Thanks for any help.
Great work Alf. Quick one: I've seen the St. Louis Fed publish 10yr Inflation Expectations. But can seem to find your index for 30y US PCE inflation expectations. Is this published? Or a variable you have constructed yourself?
Very interesting
I suspect Powell's tone will change after the midterms. Powell is an unconfirmed chair and Biden is holding a gun to his head to focus on inflation.
Hi Alf, just curious. In the equity risk premium model, why don't you choose US 10 year yield in the equation? Any specific reasons? Thanks!
Great work, Alf. Appreciate your insight as always. FWIW - ETH statistically backtests as a better short with the coming macro environment instead of BTC
Great piece. Thanks!
Best post out there on the topic
Fantastic article, Alf!!
Just one question, why do you think that this is an environment where equity risk premium needs to be repriced higher? As opposed to what is reflected in the distribution mean, 5.5?
How does one think about mortgage rates in this environment? Rising interest rates mean variable rates will increase 0.25% * the number of rate hikes, but fixed rates already have 3-4 fed hikes baked in. Thanks for your thoughts.
Also is there a way to invest in "2s 10s flattener" without using futures - e.g. an ETF?
Hi Alf. I am having trouble using your "1 sigma" stops to determine appropriate position sizes. Suppose I want to allocate (hypothetically) $100,000 in total to your portfolio. So for the short IWM my stop should be 7% away and that should correspond to 2% of my total capital, therefore the amount of IWM that I should be short would be 100000 x 2 / 7 = $28571. Similarly the amount of HYG that I should be short would be 100000 x 2 / 3 = $66667. Is that correct? Because those two positions alone then seem to be a very large fraction of my total funds, leaving very little to allocate to other positions.
Beyond the messaging to markets, is there a political component to this? My thought: Powell still hasn't been confirmed by the Senate. With all the crises du jour from the Ukraine, possible COVID increases, et. al., Powell may not get confirmed before November And if the Republicans take the Senate, is he more likely to get confirmed eventually by looking more hawkish?