markets are adjusting to a stagflationary scenario where weak demand (hindering on the ability to passthrough higher costs) would force companies to absorb higher costs therefore reducing margins and profitability. probably the worst macro environment you could face. it might be short as inflation will decelerate at least because of base effect and / or the FED might be force to be more dovish. at worst we might end up with a scenario where the FED will have to buy equities to avoid further damage. Not pretty and i agree there might be room for further repricing of risk. Wild cards? a quick end to the NPI in China, a solution to the Russia Ukraine war, replace Yellen who screwed up badly.
Nice to see someone else using earnings yield charts rather than price charts as a barometer. I've been championing it for the longest time and not many people get just how powerful of a tool it is in its simplicity.
One nitpick I might have is that macro moves in mysterious ways. I'd prefer not to rely on a trend to serve as directional signalling. My honest take is that anything can happen in macro - so be prepared for anything. Or in Munger's words, "Invert, always invert."
Thank you. Any news about the medium/long term portfolio ideas ? It would be good to have ideas for the long horizon trades. In the times where 60/40 portfolio is not effective as before. Also your tips about rebalancing the portfolio.
Excellent composition Alf, yield charts are too often discounted as being far too forward looking, but some people like to sip margaritas on the beach, while others like looking at trendlines all day.
Excellent piece Alf. ultimately, however you arrive at the conclusion, I completely agree that be cautious is the right way to behave right now. My fear is a more dramatic repricing as the economy rolls over much more quickly than the fed currently believes possible. in that case, you must be nimble because the Fed will turn dovish in the blink of an eye. be wary all summer is my view
If would be more informative to show moves in units of standard deviation instead of applying different colors which is confusing: some up moves are in red, some in green. Also, did yuan really strengthen as implied by your table? Thanks otherwise - very useful.
Amazing! Thank you for sharing Alf. Putting my confirmation bias aside, I have to say that you had me at volatility adjusted market dashboard...
My global macro trading system is all about mapping a non-lognormal distribution of volatility adjusted prices and outcomes...give me volatility adjustment or give me death!
Great piece thanks a lot. I guess the Equity Risk Premium chart can look very different of the market wakes up to chance that real rates will have to be more negative than people think to not break a system which is overly levered, particularly when you compare to other times in history when inflation was an issue. I tend to think the Fed will have to accept higher inflation and just won’t be able to raise rates sufficiently to break the back of inflation. In that case Equities could be cheap?
Another great article Alf! Your recent appearance on George Gammon's podcast was one of the best I have seen, super clear and understandable. I think it would be great if you would appear on George Noble's podcast as well.
I just watched an interesting video from some Australian analysts discussing a directive sent to banks there last year directing them to implement systems changes by October 2022 to be able to accommodate negative nominal rates. I shudder to think of what kind of inflationary impact that could have on assets and equities.
markets are adjusting to a stagflationary scenario where weak demand (hindering on the ability to passthrough higher costs) would force companies to absorb higher costs therefore reducing margins and profitability. probably the worst macro environment you could face. it might be short as inflation will decelerate at least because of base effect and / or the FED might be force to be more dovish. at worst we might end up with a scenario where the FED will have to buy equities to avoid further damage. Not pretty and i agree there might be room for further repricing of risk. Wild cards? a quick end to the NPI in China, a solution to the Russia Ukraine war, replace Yellen who screwed up badly.
Nice to see someone else using earnings yield charts rather than price charts as a barometer. I've been championing it for the longest time and not many people get just how powerful of a tool it is in its simplicity.
One nitpick I might have is that macro moves in mysterious ways. I'd prefer not to rely on a trend to serve as directional signalling. My honest take is that anything can happen in macro - so be prepared for anything. Or in Munger's words, "Invert, always invert."
Thank you. Any news about the medium/long term portfolio ideas ? It would be good to have ideas for the long horizon trades. In the times where 60/40 portfolio is not effective as before. Also your tips about rebalancing the portfolio.
Excellent composition Alf, yield charts are too often discounted as being far too forward looking, but some people like to sip margaritas on the beach, while others like looking at trendlines all day.
Excellent piece Alf. ultimately, however you arrive at the conclusion, I completely agree that be cautious is the right way to behave right now. My fear is a more dramatic repricing as the economy rolls over much more quickly than the fed currently believes possible. in that case, you must be nimble because the Fed will turn dovish in the blink of an eye. be wary all summer is my view
Great stuff Alf. Thx to Emil and Jeff for your introduction. Can’t wait to see the dashboard!
Thank you, very insightful
Great work thank you for your wisdom 👌👌👌👍👍👍
what I miss in your valuable considerations is the role of the eurodollar off shore money supply, outside any CB.
Awesome read as always Alf. Looking forward to the VAMD intro
If would be more informative to show moves in units of standard deviation instead of applying different colors which is confusing: some up moves are in red, some in green. Also, did yuan really strengthen as implied by your table? Thanks otherwise - very useful.
Amazing! Thank you for sharing Alf. Putting my confirmation bias aside, I have to say that you had me at volatility adjusted market dashboard...
My global macro trading system is all about mapping a non-lognormal distribution of volatility adjusted prices and outcomes...give me volatility adjustment or give me death!
Cheers Alf,
Great piece thanks a lot. I guess the Equity Risk Premium chart can look very different of the market wakes up to chance that real rates will have to be more negative than people think to not break a system which is overly levered, particularly when you compare to other times in history when inflation was an issue. I tend to think the Fed will have to accept higher inflation and just won’t be able to raise rates sufficiently to break the back of inflation. In that case Equities could be cheap?
Cloud you please elaborate on how you compute r*? It seems like your estimate is quite volatile - does that make sense?
Alf it's a real pleasure to read your posts, whether or not I agree in substance they always have an air of genuineness that is very refreshing.
Another great article Alf! Your recent appearance on George Gammon's podcast was one of the best I have seen, super clear and understandable. I think it would be great if you would appear on George Noble's podcast as well.
I just watched an interesting video from some Australian analysts discussing a directive sent to banks there last year directing them to implement systems changes by October 2022 to be able to accommodate negative nominal rates. I shudder to think of what kind of inflationary impact that could have on assets and equities.