Thread by @PauloMacro

This is great Sam. Just a minor difference in view from my end (talking my book here, so a big grain of salt to go with my 2 cents):
1/22

https://twitter.com/lawhon_sam/status/1621599049966141440

Markets are in a weird schizophrenic moment, with a burst of euphoria in equities on the one hand (where speculators are flooding back into what worked in the bubble just as momentum factor in L/S blows up), and disinflationary collapse pricing into US rates on the other hand.
2/

As @donnelly_brent mentioned earlier, the -50bps in late 2023 rates isn’t the beginning of a gradual cut cycle, but a probabilistic reflection of, say, a 25% chance of an aggressive -200bps response in a short period of time to a recessionary collapse.
3/

This happens in Brazil/EM often, in the other direction. A 25bp hike a few months out in the curve is not the start of a rate hike cycle, but rather the premium being priced in that the central bank might have to +100 to prevent a crisis of confidence/accident in the currency. 4/

This week should give recessionists pause: the #bigflip Reflationary Takeoff campground has a lot of empty tents, and thus a lot of room to welcome converts from the soft and hard landing/recession camps.
5/

Housing/auto data has inflected higher just as Walmart, Target et al are about to pivot from channel clearing to reordering, amidst a historic tight and unbalanced labor market… and now China is going run all of Asia hot in 2Q-3Q.

Good lord.

6/

And all this with core PCE over 4%…as the Fed slows the pace, and with loosened FCI??

The Fed will likely face a credibility issue this year. After all, you can’t flip from +50 to +25 to +50 without looking like you don’t know what you’re doing. So they will chase rates.
7/

Almost a year ago, I coined the expression that Americans are speaking Portuguese and don’t realize it yet (but think they are speaking Japanese)…
8/

https://twitter.com/PauloMacro/status/1501791551609049089

And elaborated on here
9/

https://twitter.com/PauloMacro/status/1511558164096991235

And especially here with this one:
10/

https://twitter.com/PauloMacro/status/1525860421516906500

And this one:
11/

https://twitter.com/PauloMacro/status/1566193462797533184

You want to know why the Pain Trade = Reflationary Takeoff from here (and therefore the most likely outcome because it hurts the most speculators)??
12/

All this makes the current precious metals selloff screwy, but in addition to that position flush, US breakevens *didn’t budge today* despite one of the hottest employment reports of recent years, rock-bottom initial claims, and big-time wage attrition in ADP.
13/

Even crazier, you had 1yr breakevens actually drop -14bps, 2y b/e -7bps, and 5y b/e -5bps in the past week!
14/

So nominal yields exploded, but inflation expectations went down?

So the market is entirely confident that the Fed won’t fuk this up??

But the Fed is about to commit its second emerging market central bank policy mistake in >50 years, in the span of two years! (see above)

15/

At some point inflation will likely turn higher these coming months, and investors will realize we are “positive 2nd derivative” for Growth AND Inflation…and that’s cyclical value territory…but amidst a decline in confidence in public assets and the Fed’s credibility…
16/

A year ago I had my first twitter exchange with my friend @contrarian8888… it was on gold, and I mentioned that I just didn’t think gold was ready for primetime because a liquidation flush in equities, rates, and gold were all required (we got that in October).
17/

https://twitter.com/PauloMacro/status/1490099607967256583

And then mentioned again here in June:
18/

https://twitter.com/PauloMacro/status/1542364857881722881

And lastly the rationale here which funny enough marked the top in the real 10Y:
19/

https://twitter.com/PauloMacro/status/1582723275964047361

The thing about precious metals flushing in an upside equity & rate catharsis amidst new narrative creation is precisely what gives me confidence people will move toward it - the gut check is what’s required to set the table and slingshot the trade to new highs.
20/

Needless to say, I think people barfing gold and especially silver here are handing out a gift. The potential for a narrative jam (elephants trying to squeeze through a very small door) is just too great later in the context of a high-volume corrective move today.
21/

As always, none of this is meant as financial advice, and merely a reflection of how I’m thinking about the market.
/FIN