Yes, This Time Is Different
Hi everybody, and welcome back to The Macro Compass!
Markets are front-loading the Fed pivot, and it’s a bad idea.
In this piece, we will:
Have a look at the last US inflation report;
Answer the big question: Powell pivoted in 2019, is he going for it again in 2023?
Analyze what’s priced in for bonds and equity markets: a recession, Goldilocks or what regime exactly?
Conclude by refreshing our market views and our actionable Macro ETF Portfolio
Yes, this time is different: front-loading the Fed pivot is a bad idea.
Last week’s US CPI report delivered good news: inflation is coming down, and fast.
Fixed income traders are nodding to this trend, and expect YoY CPI to print at 2.50% (!) by late summer already.
Not only that, but Powell got exactly what he is looking for:
- Inflationary pressures are less broad: the share of CPI items whose MoM annualized price increases exceed 4% is now quickly heading back down to 50% from its 75% peak a few months ago;
- The momentum of sticky inflation is fading: the 3m moving average of MoM core services ex-shelter CPI has dramatically slowed down, and it’s now in line with a 2.5-3.0% annualized core inflation
Markets have a huge recency bias.
For the last 10 years, every time inflation and growth were slowing down you had to do one simple thing.
Buy every asset you can, and front-load the upcoming Fed pivot.
So that’s exactly what markets did.
Junk bonds, Bitcoin, BBBY & Co to the moon.
Implied volatilities crushed across the board.
My mentor used to tell me the most expensive 4 words in finance are ‘’This Time Is Different’’.
Yet, I think the old adage is wrong here.
Let me show you why, what bond and stock markets are pricing in and how at TMC we position our macro ETF portfolio accordingly…
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Yes, This Time Is Different
Thanks Alf,
another fascinating article - I just wish I understood it!
In the subscriber version, you quote Stanley Druckenmuller saying that market internals are the best economist he ever met, but then seem to be saying that the market internals are completely wrong.
Presumably Stanley hasn't met you.
You say that bond pricing is in la-la land, but what would you expect to see?
Assuming we are a few months away from a recession and that there is still a divergence of views, but more people are gradually switching to risk-off (i.e. bonds), then your points A-D seem to be what often happens in the stage before reality hits.
As you imply the equity market may misinterpret these signals, but which land equities are in is a different issue.
Quis hic locus, quae regio, quae mundi plaga?
It truly is a bit different because of QT. Even if inflation normalized, the interest rate environment would stabilize, at best. In other words, liquidity is not going to be boosted any time soon -- at least until something breaks, theres a proper recession or other black swan emerges.
Hence value investing is still king.