Talking Data

The energy transition is not only incomplete, it has left many countries vulnerable to shifts in the geopolitical landscape. The narrative of “lower for longer” is dead. The only question remaining is whether or not “higher for longer” transitory. And we all know that transitory is a dangerous term.

10-year yields are up nine straight weeks, the longest such streak in over 28 years. History shows this type of rise in yields typically proves detrimental for the stock market.

While the work from home movement gets all the attention, its the derivative effects that are most interesting. More dining near the home (not the office), more home cooking, and – of course – more golfing. With some executives attempting to spark a “return to office” movement, the pushback should not be surprising. Commuting to the office is not high on everyone’s list of favorite things.

Today Alex gives us an update on where the stock market stands in terms of valuations.

Like the legend of the unicorn nothing lasts forever. The Covid era start-up boom has waned and the nose bleed valuations have disappeared as well. This is certainly (in part) due to the Fed’s decision to tighten monetary policy. But that does not explain all of it.

It is tempting to read too much and too little into the developments. If the current outlook holds, a divided government would be viewed as a marginal positive. When government cannot get anything done, stasis sets in and there is more predictability. And markets appreciate clarity and predictability.

Today Greg gives an update on the Fed’s math as QT ramps up.

When it comes to understanding how monetary policy and a slowing U.S. economy are filter through, classic cars (and other collectible / nostalgia driven “assets”) should not be ignored. The Fed wants to solve its inflation problem. Taking froth out of the system is part of it.

The Federal Reserve has embarked on a historic tightening cycle to rein in inflation. The combination of rate hikes and quantitative tightening will continue to restrict financial conditions. The effect of rate increases is relatively known, while the effect of large-scale reductions of the balance sheet remains relatively unknown.

When it comes to a tightening cycle, it is usually a good idea to simply short the Zombies. But it is also worth putting in the effort to understand the actual drivers of the business models, and not simply take everything at face value. Some Zombies just like being zombies.

Inflation was held down by four “bubbles” – cheap labor, cheap goods, cheap energy and better technology. The three “cheap bubbles” have burst and technology alone cannot offset the loss of the other three. This means persistently high inflation going forward.

Tangibles tend to be more of a hedge against poor outcomes (in a broad, macro sense), and less of a measure of risk appetite. For market watchers, there may be more of a signal in a fire breathing dragon than in Krugerrands.

The FOMC views the current labor market as – oddly – too strong. And it would be pleased to see some weakness. Monetary is all about inflation for the moment. At some point, it will pivot to a labor market that was too strong. Nothing lasts forever.

The consensus continues to view inflation as transitory across the globe, soon returning to 2%. This rests on an understanding that nothing has changed and the pre-pandemic economy is returning.