Great post, knocked some sense into me. Looks like my only bond exposure will be in i-bonds (now yielding 9.6%!). Quant friend also told me as long as inflation >3%, expect positive stock/bond correlation, which I thought was interesting as well
Hi Russell, I generally agree with you long term, but how do you think about the sequence? Clearly at least the Fed wants the market to believe that they will do whatever it takes to tame inflation, even if it means recession, job losses and an end to wage increases. Do they actually believe it or just want to slow/manage the process is another question, but I guess what I'm pondering what is the likelihood that they will make a mistake, lose control of the adjustment, and create a sharp deflationary bust in the short to medium term? At which point I don't doubt that they (and governments) would cave, and then inflation would quickly shoot back up, but again I'm just pondering the sequence... Surely it won't be linear. I usually try to avoid being too tactical, but i fear that if they screw up they could screw up big.
Totally agree! Think about it for a second, in a world, where G7 is loaded with debt, and still rising Debt/GDP, the high inflation and rising policy rates (which are still major net negative) will have a dramatic effect on interest service costs. Major chunk of US debt is still short dated and roll over costs will be even more cumbersome. In a world, where politicians are heading towards more labor friendly policies will have to foot the bill in the form of high-er commodities and raw material costs. Probably capital flows are still busy adjusting to immediate cash needs of funds, imminent risk of recessions, etc. but they will turn ugly after this adjustment, unless politicians pick recession over inflation, which as you say definitely not the case, for many years to come..
Russell as you write the exception to this is in East Asia
The Japanese yen has fallen the most of major currencies (even the Euro) as the BOJ keeps ZIRP
Surprisingly the Chinese bond market has held up, China is the only major economy with a lower interest rate now than start of 2022 (Russia is a special case due to war)
How do these two examples factor into your thinking?
Long Chinese bonds and short yen has been a hell of a trade this year!
Great post, knocked some sense into me. Looks like my only bond exposure will be in i-bonds (now yielding 9.6%!). Quant friend also told me as long as inflation >3%, expect positive stock/bond correlation, which I thought was interesting as well
Hey Russell, with the flash crash in GBP, could this be a possible harbinger that the GBP/JPY is picking up deflationary trend?
Hi Russell, I generally agree with you long term, but how do you think about the sequence? Clearly at least the Fed wants the market to believe that they will do whatever it takes to tame inflation, even if it means recession, job losses and an end to wage increases. Do they actually believe it or just want to slow/manage the process is another question, but I guess what I'm pondering what is the likelihood that they will make a mistake, lose control of the adjustment, and create a sharp deflationary bust in the short to medium term? At which point I don't doubt that they (and governments) would cave, and then inflation would quickly shoot back up, but again I'm just pondering the sequence... Surely it won't be linear. I usually try to avoid being too tactical, but i fear that if they screw up they could screw up big.
Most interesting indicators!
Totally agree! Think about it for a second, in a world, where G7 is loaded with debt, and still rising Debt/GDP, the high inflation and rising policy rates (which are still major net negative) will have a dramatic effect on interest service costs. Major chunk of US debt is still short dated and roll over costs will be even more cumbersome. In a world, where politicians are heading towards more labor friendly policies will have to foot the bill in the form of high-er commodities and raw material costs. Probably capital flows are still busy adjusting to immediate cash needs of funds, imminent risk of recessions, etc. but they will turn ugly after this adjustment, unless politicians pick recession over inflation, which as you say definitely not the case, for many years to come..
Russell as you write the exception to this is in East Asia
The Japanese yen has fallen the most of major currencies (even the Euro) as the BOJ keeps ZIRP
Surprisingly the Chinese bond market has held up, China is the only major economy with a lower interest rate now than start of 2022 (Russia is a special case due to war)
How do these two examples factor into your thinking?
Long Chinese bonds and short yen has been a hell of a trade this year!