via Sohm (YouTube)
Key themes – markets tend to take time to adapt to large structural adjustments. inflation has been running ahead of what the fed wants for a long time, but the market is still telling you that inflation will be ok. if you were to say wake me up in 10 years what would you expect? I wouldn’t expect markets to say don’t worry, inflation is going to go back to target. I think it because the fed has been so successful for so long, people have expected this to continue. People are used to making money in risky investments, because every time something went wrong, central banks could solve it, because there was no tension. If things are bad ease, because if there is no inflation there is no reason not to ease. We are in a different world now because if things go wrong, there is a tension between growth and inflation. There hasn’t been that tension before, and I think we are about to go experience it. I don’t think inflation will magically go away.
prevailing asset prices stock market is telling you there will be a modest economic slowdown, and that with that slowdown, the federal reserve will ease from 5% to 3% quickly because inflation will go back where the federal reserve wants it. You see this across stock and bond pricing. Bond pricing is telling you that inflation will come down. That leaves you where the market is very asymmetric – if you actually get an economic slowdown that would be bad for stocks. Now it will also be harder for the fed to ease – and even if they do ease it’s already priced into markets. If the economy doesn’t slow down the fed will be in a situation because they doest want to let inflation out of the bottle. so there is a lot of room for the market to be surprised whether the economy is strong or weak.
Portfolio positioning – I think it’s one of the toughest times to be an investor, and risk assets are now about as unattractive as they have been in a long time. Before you’d didn’t have to worry about diversification because the assets most investors had – equity was an outperformed. Now, you need to think about geographically – china and Japan – Japanese bankers are excited about inflation – gold had been ignored for some time. You see a reassessment of assets that have been ignored.
Gold – it’s a lump of metal that people have thought has value for 1000s of years. You get something that someone somewhere thinks has value. The problem is you are not getting interest – you need to think about what you are giving up by holding this lump of metal. So the real interest rate is a good indicator of whether its attractive to hold financial assets.
That is changing I think when Russia invaded Ukraine. when the US and Europe weaponized the dollar, so there are countries that hat worries and then the possibility that
so many central banks have shifted into gold – the fact that inflation is more volatile makes some sort of debasement event more likely. So suddenly that opportunity cost is not as significant relative to the possibility of loosing your capital.
Big longer term macro variables – those longer-term variables form your assumptions of what you assets are. when they shift you don’t realize they need to
EM for a while were a higher risk version of the SPX – that has changed because many EM are doing their own think and they tighten earlier. So as an investor you need to think about these long term trends and how they are affecting my view of what my asset is.
All Weather – what are the things that could happen that could impact my assets and finding some thing that moves opposite – the big drivers of the economy – there are natural diversifiers – if you have you bonds – the US government has
Those 2 bonds are set up to have opposite fundamental biases. the best you can have as an investor – can I do it geographically –
a lot of financial data is from when the US is the financial superpower – the US has been the winner for so long, that that has already been put into the price. The assumption that the US will be the superpower is already in the price. China is priced terribly – there are reasons for that – competition between the countries is hearing up and is becoming a big part of what policymakers in each country is making.
Each is saying how to I get more competitive and less reliant on the other side. government is getting more comfortable subsidizing, and choosing which industries do we want to make successful.
