Macro and Flows Update: July 2022 - e07

Summary

The video discusses the current macroeconomic situation, highlighting the secular increase in inflation driven by populism and income inequality. It predicts a short-term peak in inflation but expects it to rise again. The Fed's struggle to control inflation and the increasing importance of equality in politics are noted. The video also forecasts multiple contraction due to higher interest rates and a potential decline in markets, with fiscal policy responses likely to continue. It warns of a bearish outlook in the long to medium term, with potential risks including a dollar debt crisis and widening credit spreads. However, short-term market complacency is expected due to poor positioning and sentiment, but this is anticipated to be temporary.

Takeaways

• 📈 Inflation is experiencing a secular increase, with a recent high reading of 99.1% on CPI.
• 🔄 The current inflation is believed to be driven by populism, fueled by income inequality resulting from 40 years of supply-side economics.
• 🌪️ Populism is growing due to political shifts influenced by the younger generation, leading to increased focus on equality and justice in policy-making.
• 💰 The Federal Reserve's monetary policy is struggling to control inflation secularly, and the long-term outlook suggests a continued increase in inflation rates.
• 📉 Expectations for a short-term pullback in inflation to 5.5-6% followed by a rise in secular inflation due to the populist-driven economic policies.
• 🛡️ The Federal Reserve is attempting to dampen long-term inflation expectations to prevent demand pullforward and avoid an inflationary spiral.
• 💹 The cost of money is increasing, leading to market multiple contractions, margin compression, and a reverse Tina effect favoring bonds over stocks.
• 📊 The market is currently in a state of reduced liquidity, particularly in interest rates and bond spaces, with equity volatility remaining relatively muted.
• 🌐 The US dollar has been strengthening, causing global market dislocations and increasing the risk of a debt crisis in dollar-denominated assets.
• 🚨 The market is facing several risks including widening credit spreads, high yield and junk bond issues, and potential geopolitical tensions involving China and Taiwan.
• 📆 Upcoming events like earnings season and Federal Reserve decisions are expected to introduce more market volatility and potential downward pressure.

Q & A

What is the main theme of the macroeconomic update discussed in the transcript?

The main theme is the increasing secular inflation, driven by populist movements and the consequences it has on various financial markets and policies.

What recent inflation reading was mentioned in the transcript?

A 99.1% inflation reading on CPI was mentioned in the transcript.

Why is the Federal Reserve unable to control inflation secularly according to the transcript?

The Federal Reserve is unable to control inflation secularly because it is driven by populism, which was created by the Fed's own monetary policies and has led to massive inequality over 40 years.

How does the transcript link fiscal policy to inflation?

The transcript links fiscal policy to inflation by explaining that fiscal policies, which involve distributing money to people, provoke demand-side economics, ultimately causing inflation.

What are the implications of long-term inflation expectations taking hold, as per the transcript?

If long-term inflation expectations take hold, demand gets pulled forward, inventories build up, and anyone can borrow at low rates, increasing inflation and creating an inflationary spiral.

What does the transcript suggest about the future of interest rates?

The transcript suggests that interest rates will secularly increase due to the need to control long-term inflation expectations and prevent an inflationary spiral.

What does the transcript indicate about the impact of inflation on the poor population?

Inflation, being a flat tax, disproportionately hurts the poor and drives even greater populism.

What financial market trends are expected in the short term according to the transcript?

In the short term, the transcript expects more pain in the equity market, vault, and compression due to poor positioning and sentiment, as well as reduced demand from put and Vol liquidation.

What are the potential risks mentioned in the transcript for the upcoming months?

The potential risks mentioned include a dollar denominating debt crisis, widening credit spreads, high yield and junk bonds issues, liquidations in crypto, and a possible Chinese invasion of Taiwan.

How does the transcript describe the current state of liquidity in various financial markets?

The transcript describes the current state of liquidity as decreasing, with top of book liquidity in the fifth percentile and reducing day by day. There is no liquidity in the interest rate and bond space, and FX has lost all liquidity.

What advice is given in the transcript regarding investment strategies in the current market conditions?

The advice given is to be cautious and avoid being short-skeptic, as there is a significant payout sitting on the left tail that is expected in the next 3 to six months. Investors should be vigilant and aware of the potential risks and market developments.