Macro and Flows Update: December 2022 - e12

Summary

The video discusses the macroeconomic landscape of 2022, highlighting the persistence of inflation and its impact on the economy, similar to the 60s and 70s. It predicts a mild recession in 2023 due to continued inflation and fiscal stimulus, which could lead to more populism. The script also touches on the potential for increased market volatility and the significance of the first half of 2023 for investment strategies, suggesting a period of potential decline followed by a resurgence in the market.

Takeaways

• 🌪️ Inflation has been a significant and persistent issue, mirroring patterns seen in the 60s and 70s.
• 💡 The war in Ukraine has exacerbated inflation, along with OPEC plus restrictions on oil.
• 📈 Despite frequent recessions from 1968 to 1982, real GDP growth remained strong over longer periods.
• 🏦 The Federal Reserve's actions to control inflation with potentially unsuitable tools may lead to a mild recession.
• 🔄 The market is currently experiencing a period of lower volatility and cheaper skew, which could change rapidly.
• 📉 The potential energy in the market is significant, with supply still well supplied into the end of the year.
• 🔄 Expect a second leg down in the market, with Q1 of the coming year being particularly critical.
• 📊 Lagged portfolios like private equity and real estate will likely cause a reduction in collateral and slow economic activity.
• 🌐 Positive news on inflation and dollar strength may reverse, leading to increased commodity demand and inflationary pressures.
• 📈 A mild recession could lead to more populism and fiscal stimulus, which may not be beneficial for equities in the long term.
• 🚀 The potential for a significant market downturn is building, with low long volatility and increasing risk premia indicating a possible major event on the horizon.

Q & A

What macroeconomic trends were discussed as having occurred over the past year?

The video discusses sticky inflation, an increase in populism, and a shift from cooperation to competition in global politics, exacerbated by the war in Ukraine and OPEC+ oil restrictions.

How does the current inflationary period compare to historical periods of inflation?

The current inflationary period is compared to the 1960s and 1970s, noting similar patterns of more frequent recessions but also periods of strong real inflation-adjusted GDP growth.

What is the predicted economic outlook in terms of recession and inflation?

The outlook predicts a mild recession, which is seen as worse than a deep recession due to its potential to increase populism and demand for fiscal stimulus, thereby exacerbating stagflationary pressures.

How does the Federal Reserve's approach to controlling inflation potentially affect the economic outcome?

The Federal Reserve's use of what are considered the wrong tools to control inflation is expected to contribute to a mild recession rather than mitigating economic downturns effectively.

What are the implications of the current economic situation for equities and market pricing?

The economic situation, marked by stagflation and a shift in market pricing, is deemed bad for equities. A notable decrease in market skew is mentioned, indicating a significant change in market sentiment.

What role does the performance of the dollar and Chinese economic policies play in the global inflationary landscape?

Dollar strength has exported inflation from the US, while China's economic policies, including its response to COVID-19, are expected to influence commodity demand and global inflation as the country reopens.

What is the significance of the new year in the context of the economic and market analysis presented?

The new year is significant due to the expected remarking of assets like private equity and real estate, which will influence collateral levels and potentially reverse some of the previous year's market trends.

What is the expected impact of a mild recession on stock buybacks and overall market activity?

A mild recession is expected to slow stock buybacks and overall market activity, contributing to a challenging environment for equities.

How does the video describe the potential for market volatility and investment strategy in the coming year?

The video predicts increased market volatility and suggests cautious investment in long volatility positions, anticipating significant market movements and opportunities for strategic investment.

What cautionary advice does the video offer to investors for the upcoming year?

Investors are advised to be cautious due to the potential for increased volatility and market downturns, with an emphasis on being prepared for significant economic and market shifts.