Alf Profile picture
13 Jan, 7 tweets, 3 min read
A global macro update.

Focusing on the daily swings might lead you to miss the forest for the trees, but we are still firmly in the secular Quadrant 1 here.

Vol has increased though, which means we are going to temporarily swing through Quadrant 4 and 3 at times.

The pace of growth of credit injection through the real economy has stalled to very low levels since mid-21.

This implies a weaker impulse to real growth and earnings until at least summer 2022...

...and a repricing down of inflation expectations too: basically, a still-okaysh nominal growth but on a clearly decelerating trend.

Lower inflation break-evens while the Fed embarks in a tightening exercise lead to higher front-end real interest rates, but...

...I still argue policy is net-net at an easy level, making my base case the secular Quadrant 1 and not the scary Quadrant 4: why?


A) 5y forward 5y real yields are still 70 bps below equilibrium levels
B) The Fed will implement QT in a pretty soft fashion in '22

Tomorrow I will post a separate thread on what a ''soft QT'' looks like, but it's important to know the pace of monetary tightening is the key determinant rather than the tightening itself

Temporary episodes of risk-off (Quad4) and optimism (Quad3) will be frequent though

The best tactical risk-reward trades here remain to buy long-end bonds (outright, or better against short-end bonds) on sell-offs and fade outsized ''the economy is booming and long-end nominal yields to the roof'' proxy trades.

See here

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More from @MacroAlf

15 Jan
Big flows move markets.

The biggest flows in fixed income come from the so-called “real money”: pension funds, bank treasuries etc.

Let me explain when they go big.
To get there, you have to understand their incentive scheme.

A hugely important thread.

You might think real money buys or sell big sizes of bonds when they have strong conviction on the next move in yields.

Absolutely not.

CIOs and PMs there are not paid more if they generate alpha, but they can be fired if they mess up: incentive schemes matter.

A lot.

Instead, they go big for two main reasons.

A) Regulation forces them to
B) They have some market risk to (un)hedge

Notice how in both cases they have their a*s covered.

Nobody can blame you for sticking to regulation or saying “it was a hedge” if you bleed P&L.

Read 7 tweets
9 Jan
QT is a big deal, yes.

But the main reason is not what you think it is.

To understand QT, you need to understand QE first.

QE happens when Central Banks create bank reserves out of thin air, and purchase bonds from the private sector with them.

The pvt sector asset composition is forcefully swapped from bonds to inert reserves/deposits.

The private sector does not have more net worth.
Its asset side's composition has just been swapped: less duration intensive & coupon bearing bonds, more zero duration & low-yielding reserves or deposits.

Now, QT is the exact opposite of this.

But before we go there...

Read 10 tweets
8 Jan
We like simple narratives.

The Fed goes brrrr, stock market goes up: but the Fed doesn’t print money.

Now, the Fed is not going to hike or do quantitative tightening because they always want to ease: but they are going to tighten.

Oh yes, and even do QT.
Here is why.

What is their incentive scheme?

Preserve the status quo, kick the can down the road.

The risk/reward of not tightening when the labor market is very tight, inflation is at 7% and policy is ultra accommodative is just…horrible.

Nobody can blame Powell for tightening here.

& nobody can blame him for trying to reduce excess liquidity - getting away from 0% rates and a $9 trn balance sheet buys the Fed some optionality to fight future downturns

Also, mid-terms are coming and the political pressure to be seen “acting against inflation” is high

Read 4 tweets
4 Jan
10y Treasury yields are 12 bps higher YTD.


Let's first decompose the move: changes in real yields and changes in inflation expectations.

Real yields are 11 bps higher YTD, hence explaining >90% of the nominal yields move.

Inflation expectations are unchanged.
What does this mean?

Real yields move higher for 2 main reasons: real growth is repriced higher, or risk premia get built in assets as financial conditions are unduly tightening (e.g. policy mistakes, major liquidity distress, credit crunches)

Today, it's a cyclical real growth re-rating story

Read 10 tweets
2 Jan
The chart below shows the US Wilshire 5000 total return index (incl. reinvestments of dividends) against gold, both rebased at 100 starting 40 years ago.

The stock market has obviously outperformed gold over the last 40 years, and it's likely to do so in the future.


Stock market total returns are mostly driven by dividend yields, earnings growth and changes in valuations.

The distribution of dividend yields and earnings growth are skewed to deliver positive returns on average (dividend yields are positive, and earnings tend to grow).

Changes in valuations can be very volatile, but the real return on risk-free rates alternatives (bond real yields) tend to influence BOTH valuations in stocks and gold prices.

Basically, gold gets a tailwind from lower real yields.
Stocks too, but also from DY + EPS growth!

Read 4 tweets
2 Jan
The prevailing narrative regarding the pandemic seems to be that Omicron will turn it into a harmless endemic straight away in 2022

Peer-reviewed pieces in The Lancet and Nature partially confirm this thesis, but on a big picture basis we are heading in the right direction

The Lancet piece shows how effective antibodies to C-19 have a median life of around 165 days - that means the median person infected with Omicron today should get ''natural immunity'' until summer.

Sometimes, antibodies can last much longer though.

Research continues, luckily

C-19 pills (e.g. Pfizer or Merck) are being approved, and they seem to be able to reduce severe symptoms by 90% or so - that's great

The not-so-good news is that large scale production will only happen in 2023, so benefits for 2022 are limited

Read 6 tweets

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