MacroVoices #395 Simon White: Inflation, Stocks & Why TINA is Coming Back
Sep 28, 2023
auto_awesome
Bloomberg's Macro Strategist, Simon White, joins MacroVoices to discuss inflation, recession narratives, and credit market risks. They explore the potential return of inflation and its implications for asset allocation. The chapter also discusses the deteriorating credit market, the speaker's personal motivation for creating an energy transition documentary series, and analysis of crude oil drawdown and its market implications.
A soft landing narrative is misguided and a recession is more likely than the consensus suggests.
Central bank policies have had limited direct impact on bringing down inflation, which is expected to catch the market off guard.
The shift in stock-bond correlation challenges traditional portfolio allocation strategies, leading to concentration risk and a lack of suitable hedges.
Deep dives
Main Idea 1
The podcast episode discusses the shift from recession narratives to a soft landing scenario, highlighting that the consensus seems to have moved towards favoring a soft landing over a recession. The speaker mentions that there is uncertainty in defining a recession accurately and emphasizes that a hard landing would be clear in the event of a recession. The possibility of a recession is also analyzed based on interactions between hard and soft data, which could lead to recessions when certain thresholds are crossed. The current situation is described as a potential turning point where both hard and soft data are stressed, causing concern. The speaker believes that the soft landing narrative is misguided and that a recession is more likely than the consensus suggests.
Main Idea 2
The podcast episode explores the return of inflation as a secular trend and its potential impact on various markets. The speaker argues that the remote reason behind most historical inflations is the central bank monetization of large fiscal deficits, which began even before the pandemic. The pandemic and other events have exacerbated the supply and demand issues, resulting in elevated inflation. The speaker suggests that central bank policies have had limited direct impact on bringing down inflation so far. They also highlight the role of China's struggling economy in contributing to future inflation. The implication is that inflation will return and potentially catch the market off guard, as current market expectations do not anticipate a re-acceleration in CPI. The speaker emphasizes that the market is not adequately prepared for a sustained period of elevated inflation.
Main Idea 3
The podcast episode examines the shift in stock-bond correlation and its potential consequences. The speaker acknowledges that the traditional relationship between stocks and bonds, which served as a hedging tool in portfolios, is no longer valid due to positive stock-bond correlation. They discuss the implications of this shift, including the challenge it poses to risk parity strategies and 60/40 portfolio constructions. The speaker suggests that as this correlation continues to stay positive, investors may need to reconsider their portfolio allocation strategies. This shift could lead to higher concentration risk and force investors to seek alternatives, such as commodities or gold. However, given the constraints and requirements of many institutional investors, finding viable alternatives may be challenging, potentially leading to an increased focus on equities and a lack of suitable hedges.
Main Idea 4
The podcast episode touches on the challenges facing the credit market and its potential impact on financial markets. The speaker highlights indicators that point to a deterioration in the credit cycle, such as tightening lending standards, declining demand for loans, rising charge-off rates, and an increase in bankruptcy filings. However, credit spreads do not seem to reflect this deteriorating trend, partially due to the impact of VIX and the Merton Distance to Default Model. The speaker raises concerns about potential delays and distortions in price discovery within the private credit market. They also suggest that credit spreads could act as a vector between the real economy and financial markets, leading to more serious consequences if credit markets suddenly deteriorate. The overall implication is that credit markets may not be accurately reflecting the true underlying fundamentals, and a deeper understanding of credit dynamics is necessary to assess potential risks.
The Rise and Need for Small Modular Reactors (SMRs)
The podcast episode underscores the importance of small modular reactors (SMRs) in achieving an energy transition and breaking our addiction to fossil fuels. It highlights that to achieve this transition using SMRs alone, we would need to build 180,000 generation four SMRs by 2050. The episode explains the advantages of building gigawatt power plants using multiple SMRs in the same building, emphasizing the benefits of assembly line manufacturing, economies of scale, and quality control. It argues that SMRs offer a solution to our fossil fuels addiction and calls for a sovereign nation serious about becoming a global leader in energy to step up and support this technology.
The Market Outlook and Concerns in Equities
The podcast discusses the current market outlook, particularly in equities. It highlights that the S&P 500 may face more downside and that while short-term rallies might occur, they should be sold as broader market conditions remain bearish. The podcast points out that the relative strength of the Mag 7 (large tech companies) has kept the overall market somewhat stable, but concerns arise as key tech names, like Amazon, Microsoft, and Apple, show signs of breaking down. The discussion also touches on the potential for volatility to increase, which could lead to risk-off sentiment and wider market sell-offs.
MacroVoices Erik Townsend and Patrick Ceresna welcome back Bloomberg’s Macro Strategist, Simon White to the show. Simon and Erik will discuss inflation, deflation and stock bond correlation.
