I've written a lot about inflation recently. I still think markets are at the mercy of inflation and the triumvirate of doom, which means that the U.S. inflation report is likely to remain the most economic piece of data for markets, for the foreseeable future. I haven't been looking at the inflation trades for a while, however, which I will seek to make amends on here. Falling inflation eventually will allow central banks to perform the much-discussed pivot, both in terms of the speed of tightening and eventual terminal rate. The latter follows naturally from the fact the tightening cycle's end point inevitably draws nearer as central banks continue to raise rates. An even bigger question is what inflation regime will emerge once the current fever breaks—and it will break, eventually. Markets ought to be able to tell us something about that.
Read MoreThere are a lot of things we don’t know about Russia’s attempt to invade Ukraine, but there are also some things we do know. Mr. Putin’s gamble, and the West’s response, has brought into view one of the few existential tail risks that isn’t a Black Swan, which is to say, it is a known unknown: The risk of an escalation into war between Russia and NATO, and the exchange of nuclear weaponry. The continued call on NATO from Ukraine president Volodymyr Zelensky to impose a no-fly zone his country is an alarming case in point. I have no idea how to quantify such a risk, and it is fair to assume that markets don’t either, at least not with any accuracy. BCA’s suggestion that you might as well be long stocks on a 12-month basis, even if you think an ICBM is headed your way is probably a fair reflection of the level of analysis you can expect from your favourite sell-side researcher. Take everything you read with a heap of salt.
Read MoreMarket observers and participants have been temporarily distracted in the past week by the battle between Reddit’s plucky retail investors and lazy short-selling hedge funds over the fate of Game Stop. It won’t be the last time the world stops to watch such an event in the same way that people, who would otherwise never watch a race, are glued to the screen when F1 drivers crash into the barrier or each other. Pundits have tried to turn this into more than it is, but until people turn up with actual pitchforks in front of Mr. Griffin’s $60M penthouse pad in Chicago, I am inclined to side with George Pearkes’ take on the matter; move on, nothing (much) to see . People with time on their hands, and a stimulus cheque(?), have decided to take a punt. On the face of it, they have been successful, but most will have bought and sold too late to avoid the gut-wrenching losses that are all but inevitable in the context of the kind of volatility, which Game Stop has exhibited recently. Meanwhile in the boring and dusty world of global macro trading, investors’ eyes are still focused on the long bond in the U.S., where it is, or isn’t, going, and what this means for other asset classes, the economy, not to mention the Fed’s reaction function? Friday’s NFP report was, as ever, a case in point.
Read MoreBridgewater Co-CIO Bob Prince was ridiculed earlier this month for his comments in Davos that “we’ve probably seen the end of the boom-bust cycle.” Pundits were quick to draw comparisons to Irving Fisher’s infamous remark on the eve of the 1929 stock market crash that the equity market had attained “a permanently high plateau.” I sympathise with this interpretation of Mr. Prince’s comment. They come on the back of a 21% 12-month rally in the MSCI World, in an environment where trailing earnings have declined, by nearly 5%. In other words, the P/E multiple has gone from around 15 to just over 20 in the space of a year, and this in an environment where global growth has been slowing. To pile on even further, the recent performance of global equities has been ridiculous, with monthly returns over +2% since September. Naturally, the key for any medium-to- long term investor is to make sure to be long during such periods, but I under- stand if Mr. Prince’s declaration has contrarian investors running for exits. I can’t help but feel, however, that the world is upside down. The speed with which Mr. Prince’s comments was shot down seems to invalidate the contrarian position to me. I mean shouldn’t we be worried only if investors and analysts agreed with his comments.
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