Thread by @macrocredit

It is rare for central bankers to be blunt.

Huw Pill's "people need to accept" they're poorer is more than a slip of the tongue.

What central bankers are telling you, is they will not be able to do their job.

Balancing price stability vs financial stability in a post #QEinfinity world is a difficult act.

“There is no trade off between price stability and financial stability", said ECB President @Lagarde in March.

That is true, until something breaks.

But the recent SVB, CS and FRC crises show us that after over a decade of low rates and low volatility, the financial system is fragile.

And that the solution inevitably involves some degree of government support.

What are the conclusions?

- Inflation is a social and distributional conflict, as O. Blanchard has pointed out. Why should people accept being poorer when QE has made the rich richer? (ft.com/content/4c5358…)
- They won't. And governments will have no choice but to spend.

- Fiscal deficits will be persistent and drive demand, but also erode risk-return in tight government debt (e.g. France downgrade).
- Investors used to a goldilocks environment of low yields, low inflation and rising corporate profits will have to rethink their view of the world.

With persistent inflation and central banks constrained by persistent fiscal deficits and inflation, markets remain optimistically priced for a pivot.

But the pivot might not come. The RBA, which tried to pause twice, has just hiked again.

After getting transitory wrong, central banks will hold on to what credibility they have left. No one wants to be Arthur Burns.
Conclusions
- 🚫 pivot
- Volatility ⬆️
- Safe havens ⬇️
- Long/short > long only
- Credit > govies
- Real assets > paper assets
andromedainvestors.com/investor-lette…