Liquidity Is Rising, "Tug Of War" Between Stocks & Bonds | Julian Brigden
Nov 23, 2023
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Julian Brigden, Co-Founder of MI2 Partners, discusses the path ahead for the Fed, the ongoing tug of war between stocks & bonds, the ripple effect of inflation & the structural bear market in the bond market. He also analyzes the similarities between the recent market behavior of Bitcoin and the NASDAQ, and explores the rise of populism and its impact on the current political climate.
The shift in corporate mindset towards raising prices indicates a significant change in the approach to corporate earnings amidst potential rising inflation.
Market expectations for inflation may not align with consumer expectations, raising concerns about the sustainability of current Fed policy and its impact on financial conditions and the dollar.
The mismatch between current market pricing and the potential consequences of rising inflation and fiscal spending could lead to increased yields and instability in the bond market, posing risks to balanced portfolios and government debt stability.
Deep dives
Inflation and Corporate Profitability
The podcast episode discusses the potential for rising inflation and its impact on corporate profitability. The speaker highlights that corporate profitability is increasingly driven by price increases. They mention the example of Fed governors questioning local executives about raising prices, with two-thirds of the audience indicating a willingness to raise prices by 5% or more. The speaker suggests that this shift in mindset towards raising prices indicates a significant change in the approach to corporate earnings. They also mention the potential consequences of this trend for inflation.
Inflation Expectations and Fed Policy
The podcast explores the disparity between market expectations for inflation and the inflation expectations of consumers. It highlights that inflation expectations of consumers, as measured by metrics like Michigan inflation expectations, have historically been relatively accurate in predicting inflation trends. The speaker suggests that the current market pricing, which includes expectations of rate cuts, may not align with the inflation expectations expressed by consumers and experts such as Stan Druckenmiller and Paul Tudor Jones. The speaker raises concerns about the sustainability of current Fed policy and the potential consequences for financial conditions and the dollar.
Financial Conditions, Yield Movements, and Fiscal Dominance
The podcast episode delves into the relationship between financial conditions, yield movements, and fiscal dominance. The speaker asserts that financial conditions are not tight enough, and that current market pricing does not align with the potential consequences of rising inflation and fiscal spending. They suggest that the push for more debt issuance in a shrinking pool of available savings could lead to increased yields and potential instability in the bond market. The speaker discusses the concept of fiscal dominance and the potential risk it poses to the stability of government debt. They also raise concerns about the sustainability of current fiscal and monetary policies, and the impact on balanced portfolios.
The potential risks of Fed's approach and mispricing in the US curve
The speaker raises concerns about the Federal Reserve's approach to monetary policy and its implications for the US economy. They highlight the dangers of pursuing a more aggressive policy amidst mispricing at the front end of the US curve. They argue that the market's expectation of significant rate cuts next year does not align with the current economic conditions, and unless there is a recession, such rate cuts don't make sense. The speaker also warns about the impact on the equity market valuation if expected rate cuts do not materialize.
The market's reliance on liquidity and potential implications for bonds and the equity market
The podcast discusses the correlation between liquidity and the equity market, noting that liquidity has become a major driving force for equities rather than interest rates. They emphasize that if the equity market continues to rise without contributing to the tightening of financial conditions, bonds will have to bear the burden. The speaker suggests that the equity market appears stretched and vulnerable, with a narrow breadth and a rickety resemblance to a classic bubble. They also express concerns about potential government actions against cryptocurrencies and the need for investors to carefully assess the risks amid the changing landscape.
On today’s episode, Julian Brigden Co-Founder of MI2 Partners joins the show to reflect on the current state of markets as financial conditions loosen & markets price in a goldilocks environment, as they deem the Fed's inflation fight over.
We discuss the path ahead for the Fed, the ongoing tug of war between stocks & bonds, the ripple effect of inflation & the structural bear market in the bond market. To hear all this & more, you'll have to tune in!
Research, news, data, governance and models – now, all in one place. As a listener of On The Margin, you can use code "MARGIN10" for a 10% discount when signing up to Blockworks Research https://www.blockworksresearch.com/
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Disclaimer: Nothing discussed on On The Margin should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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