Makes sense but looking past that doesn't it raise the risk of a credit/liquidity event down the road (say H2 23 or 2024)? My read is that last Fall stuff (esp. financial markets - Stocks yes but mostly long bonds and USD) seemed fairly close to break and the Fed and the Treasury (not sure what's the level of coordination here) decided to raise their foot off the brake a little bit to achieve a disinflationary soft landing... Was probably too early and with that and China reopening markets looked forward and FCI re-eased too fast too quick... So now yes it's likely that at least the higher for longer scenario will get repriced (if not even a higher terminal rate), but then it will bring some markets close to breaking point again (housing, leveraged credit,...), maybe quite quickly.
I think this cycle is really difficult because the economy is really out of sync... Some sectors seem still strong but others seem vulnerable... And monetary tightening is quite a blunt tool. So it's hard to play, especially if the repricing of higher for longer probability is slow and gradual... But if it's brutal and rates very quickly go back to last autumn's highs and stay there or break them, I'd be inclined to fade it. And then expect more fiscal stimulus and monetary reversal... But might not be immediate with debt ceiling negotiations... So air pocket then back to structural inflation in maybe 6 to 12 months after that.
I don't want to be too cute so I'm trying to structure my portfolio as a barbell. Commodities look cheap in the inflation re-acceleration scenario but still want to have a decent cash position, some 2Y exposure + rate hedges look close to become attractive again in my view. Pondering 5Y or 10Y TIPS too, look like decent performers in both scenarios ( at least as buy and hold).
Hi russel a question on bank stock performance in rising inflation environment.for me yes there’s a positive impact from NIM expansion early in the rate cycle but later you have risk of low credit demand and high cost of risk.what do you think ?
Russell - how does subsidy factor into your thinking given that the fact that Big Mac & McNuggets pricing is heavily dependent on subsidy of animal feed inputs?
Meat consumption is also in decline and will continue to, if not speed up...
This thesis must fit your earlier presentation on short sell opportunities there too.
If Chinese pork prices start rising (amongst other commodity prices) I expect to see the PBoC allow the yuan to appreciate to offset inflationary pressures. Very good for Chinese bonds.
Biggest contra indicator so far is the Mo is gone. Thanks for this piece. Very clear. So many data points floating around at the moment to justify one position or another. I like your corn price method, I don’t think people have factored in another wave of food/grocery price increases coming this year which will drive wage inflation.
Makes sense but looking past that doesn't it raise the risk of a credit/liquidity event down the road (say H2 23 or 2024)? My read is that last Fall stuff (esp. financial markets - Stocks yes but mostly long bonds and USD) seemed fairly close to break and the Fed and the Treasury (not sure what's the level of coordination here) decided to raise their foot off the brake a little bit to achieve a disinflationary soft landing... Was probably too early and with that and China reopening markets looked forward and FCI re-eased too fast too quick... So now yes it's likely that at least the higher for longer scenario will get repriced (if not even a higher terminal rate), but then it will bring some markets close to breaking point again (housing, leveraged credit,...), maybe quite quickly.
I think this cycle is really difficult because the economy is really out of sync... Some sectors seem still strong but others seem vulnerable... And monetary tightening is quite a blunt tool. So it's hard to play, especially if the repricing of higher for longer probability is slow and gradual... But if it's brutal and rates very quickly go back to last autumn's highs and stay there or break them, I'd be inclined to fade it. And then expect more fiscal stimulus and monetary reversal... But might not be immediate with debt ceiling negotiations... So air pocket then back to structural inflation in maybe 6 to 12 months after that.
I don't want to be too cute so I'm trying to structure my portfolio as a barbell. Commodities look cheap in the inflation re-acceleration scenario but still want to have a decent cash position, some 2Y exposure + rate hedges look close to become attractive again in my view. Pondering 5Y or 10Y TIPS too, look like decent performers in both scenarios ( at least as buy and hold).
Have you looked into the Ohio disaster at all? And possible future impacts on gas production / agriculture if no one can live there / nothing grows?
Hi russel a question on bank stock performance in rising inflation environment.for me yes there’s a positive impact from NIM expansion early in the rate cycle but later you have risk of low credit demand and high cost of risk.what do you think ?
Thanks Russell. This food price theme is super interesting and under-covered.
Russell - how does subsidy factor into your thinking given that the fact that Big Mac & McNuggets pricing is heavily dependent on subsidy of animal feed inputs?
Meat consumption is also in decline and will continue to, if not speed up...
This thesis must fit your earlier presentation on short sell opportunities there too.
This inflationary upcycle still has legs to run, I agree there.
Chinese pork prices (the real driver of grain prices worldwide) are now back at longer term averages
https://en.macromicro.me/collections/24/cn-price-relative/12773/cn-pork-price-vs-cpi
If Chinese pork prices start rising (amongst other commodity prices) I expect to see the PBoC allow the yuan to appreciate to offset inflationary pressures. Very good for Chinese bonds.
Biggest contra indicator so far is the Mo is gone. Thanks for this piece. Very clear. So many data points floating around at the moment to justify one position or another. I like your corn price method, I don’t think people have factored in another wave of food/grocery price increases coming this year which will drive wage inflation.