Ep. 202: Alberto Gallo on Trump, Fiscal Risks, and Market Outlook
Feb 9, 2024
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Alberto Gallo, Chief Investment Officer and Co-founder at Andromeda Capital Management, discusses the market focus on rate cuts, the importance of the new fiscal regime, inflation risks, political factors, populist policies, private equity, market complacency, and the intersection of markets and technology.
Central banks may cut rates, but it will be gradual and not as extensive as previously priced in.
Politics plays a significant role in macro analysis, shaping economic policies and influencing market dynamics.
Adjustments in traditional portfolios are needed, with increased focus on credit, corporate bonds, and real assets for better hedges against inflation.
Deep dives
Shifting Narrative of Central Banks and Inflation
Investors have focused on expectations of interest rate cuts, assuming they will boost risk assets and economic growth. However, central bankers are pushing back, pointing to more persistent inflation and a cautious reaction function. The market's excitement may be overdone, leading to complacency. While central banks may cut rates, it is expected to be gradual and not as extensive as previously priced in.
Political Influence on Macro Analysis
Politics plays a significant role in macro analysis, often overlooked by focusing solely on central bank policies. Recent shifts in fiscal policy have led to pro-cyclical spending, increased investment, and structural changes. Factors such as political rhetoric, wealth inequality, and changing demographics shape economic policies and influence market dynamics.
Implications of Capitalism and Policy Failure
The current combination of policies has failed to increase productivity, raise wages, distribute wealth, and provide opportunities. Populist leaders emerge by promising dreams, polarizing against enemies, and implementing unsustainable economic policies. Social inequality and corporate monopolies hinder growth and investment. The need for reforms and changes in economic policy is necessary to address these failures.
Portfolio Adjustments and Outlook
The investment landscape calls for adjustments in traditional portfolios. Increased focus on credit, corporate bonds, and real assets can provide better hedges against inflation. Opportunities lie in the middle section of the credit market, rather than excessively safe or risky assets. Dispersion and relative value trading seem more attractive than waiting for distressed entry points. Equities may benefit from a broadening rally, with a potential shift in the global order leading to a multipolar world.
Interest Rates and Default Rates
Interest rates are expected to rise gradually, reflecting a higher equilibrium rate and less dovish reaction function. Default rates are projected to increase gradually but remain contained due to companies proactively refining and pushing out maturities. Stress and defaults are clustered in specific sectors rather than a widespread distress scenario. Central bank communication and fiscal stimulus are expected to mitigate volatility in the market.
Market Outlook and Opportunities
The market currently exhibits complacency, with credit spreads and implied volatility at low levels. Value can be found in credit markets outside the US, where higher yields make it attractive, especially given the relatively stable default environment. Longer duration assets, such as government bonds, are less appealing due to higher rates and potential volatility. Equities offer opportunities, particularly in sectors affected by China exposure, while considering potential volatility stemming from higher rates.
Alberto Gallo is Chief Investment Officer and Co-founder at Andromeda Capital Management. Prior to that, Alberto initiated and ran the Global Credit Opportunities fund at Algebris Investments. Previously, he ran macro credit research at RBS in London, and served in senior research roles at Goldman Sachs in New York, Bear Stearns in New York and London, and Merrill Lynch in London. In this podcast we discuss: the market being too focused on rate cuts, the importance of the new fiscal regime, inflation risks, and much more.
