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Satori Insights: The mind-bending maths of fiscal financing
Matt King, formally of Citi recently founded his own research firm Satori Insights. In this note King says that while persistent fiscal deficits are increasingly cited as the number one reason to short bonds, the historical record is remarkably and perplexingly clear: high debt levels, and even high fiscal deficits, have historically been associated with bond yields falling, not rising.
Only in part does this reflect factors like financial repression, says King. It is also due to the counterintuitive nature of the credit creation process itself, he says. Click here for the full report.
Roth MKM: Another Drag off the Soft Landing Peace Pipe
Risk markets remain in the firm grip of an inflation-and-rate reaction function with already high hopes for a “soft landing” soaring if/when inflation and rates fall
This all of this presupposes that either the neutral interest rate is not now below the Fed’s policy rate or will not fall much below it in the future
This increases hard landing risks, as a policy rate above neutral means growth below trend and elevated recession risk. Fed rate cuts are likely in a hard landing or recession scenario, but they are very unlikely in a soft/no landing environment in which risk assets are soaring. Click here.
MI2 Partners: The longer the tug of war between Growth and Inflation goes on, the less likely the soft landing
Unfortunately, the subsequent easing of financial conditions, which suggests the economy will slow only slightly into Q1 2024, runs counter to the “higher for longer” element of Opportunistic Disinflation and Powell’s recently stated objective.
Thus, at some point and for the Nth time in this tightening cycle, Fed officials will push back against renewed animal spirits and the easing of financial conditions. The problem is that, like the economy and especially employment, markets work off momentum and can only tread water for a short time.
Eventually, something breaks down, or we slide into recession. The longer the tug-of-war between the Fed and easing financial conditions persists, the lower, not higher, the odds of a Goldilocks outcome. Click here.
Gavekal: Bear markets by degree; A ratio to watch; S&P500/Gold price
What is the best indicator to determine the difference between an Ursus bear market and an Ursus magnus bear market
Charles Gave says always check whether the ratio between the S&P 500 and gold price is above, or below, its seven-year moving average.
For now, the ratio between the S&P 500 and the gold price is not signaling trouble but it shows a worrying pattern. Click here.
Pennock Idea Hub: Five bullish reversals that you may have missed
Recently a series of positive technical, macro and fundamental reversals have occurred to alleviate concerns of about a U.S. recession and a rising term premium in the Treasury market. These reversals of an extremely bearish psychology are bullish for risk assets. Click here.
A Surprise Reversal
A Credit Reversal
A Term Premium Reversal
An Earnings Expectations Reversal
An Emerging Market Risk Reversal
