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Wednesday, Feb 16

Some of the big beasts of the economic world have been questioning the extent of the output gap and the likely implications of massive fiscal stimulus on inflation – you can view the debate between Larry Summers and Paul Krugman here.  In today’s Macro Briefing, we take a closer look, with Unicredit explaining why it is much more of an issue in the US, given the “mind bogglingly” different fiscal approach taken by policymakers in the eurozone. Meanwhile, opinions certainly differ, with MI2 Partners setting out why inflationary pressures are a major risk for bonds and equities that is under appreciated in the market, but Rosenberg Research argues that the output gap is much larger than most believe, and why inflation is less of a problem from the fiscal stimulus. Elsewhere, an important piece form Goehring & Rozencwajg explains why the billions pouring into the clean energy space are at best likely to disappoint in addressing climate change targets, and MRB Partners outlines why it is still bullish on the long-term prospects for small cap stocks after their recent strong performance.   
  1. fiscal stimulus output gaps Unicredit

    1. The ”mind-bogglingly” fiscal divide

    Erik Nielson says the fiscal plans of the US and the eurozone for 2021 are ”mind-bogglingly different,” and as a result could potentially to lead to very divergent economic outcomes in the coming years. The US government is planning to inject some USD 2.8 trillion this year in discretionary fiscal measures, while the eurozone plans to inject just EUR 420bn for the same objectives. Nielson says the difference seems completely out of proportion – and if anything, the wrong way around. That is because the economic cost of the pandemic has hit Europe considerably harder than the US and the eurozone output gap is now roughly double the size of the US output gap, he says. Furthermore, adds Nielson, in contrast to the US the slow rollout of vaccinations means the reopening of the eurozone economy is unlikely until 2022. If you’re interested in reading the full note, click here to contact us for access.
  2. Inflation output gap US Treasuries MI2 Partners

    2. Bonds as the catalyst for the next big market correction

    MI2’s Julian Brigden says that as the output gap closes, inflation typically rises, and the gap could close quickly, especially when permanently lost capacity/de-globalisation is taken into account. He sees this as a major risk for the bond market, a risk the market is underestimating, and while the Fed may seek to control any disorderly price action, he doesn’t think they have the ability to control the whole curve. Ultimately this is also bad for equities too, Brigden says. We worry about the mega-cap, momentum names with their super high P/Es that dominate the US market.  At some point, even if real rates remain contained, won’t investors notice that their discount factor has tripled or more? If you’re interested in reading the full note, click here to contact us for access.
  3. Inflation output gap services Rosenberg Research

    3. Mind the output gap, and falling services prices keep inflation at bay

    Dave Rosenberg’s macro economy views always add perspective and cut through the noise. His latest analysis argues that the output gap in the US is much larger than official estimates, thus inflation is less of an immediate problem from the fiscal stimulus. Rosenberg also digs into inflation in more detail, arguing that most economic forecasters fail to take account of the influence of services on price indices. He also looks at what lessons 2021 policy makers might take from 1970s UK as they embark of this expansive Keynesian exercise. If you’re interested in reading the full note, click here to contact us for access.
  4. cleantech Climate change energy transition Goehring & Rozencwajg

    4. Ignoring energy transition realities

    This research note explains in detail the imminent harm awaiting investors and policy makers who fail to acknowledge certain realities of the energy transition theme. G&R say that every green energy proposal they have examined relies on the trifecta of wind, solar, and electric vehicles combined with various battery technologies. In recent months, a renewed “hydrogen mania” has broken out as well, which adds a fourth leg to the green energy stool. Unfortunately, based upon their extensive research, these plans, including the current hydrogen craze, are bound to at best severely disappoint and, at worst, outright fail in what they attempt to accomplish. G&R are by no means fossil fuel cheerleaders, and their research is deep and detailed, as they pull apart many of the assumptions the many of the leading energy experts have made about the environmental benefits accrued from the energy transition. This piece is a must read. If you’re interested in reading the full note, click here to contact us for access.
  5. small caps MRB Partners

    5. US small caps – in need of a pause that refreshes

    The relative rally in small caps is technically stretched, implying that a pullback or correction is likely in the near run, according to Salvatore Ruscitti at MRB Partners. He says investors with overweight positions and a short-term investment time horizon may wish to tactically trim exposure to these stocks. The long-term outlook, however, remains positive, says Ruscitti. Small-cap stocks will generate superior earnings growth as the economic recovery solidifies, he says, while favourable financial and credit conditions should keep investors’ risk appetites healthy, which also bodes well for their longer-term relative performance. If you’re interested in reading the full note, click here to contact us for access.