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The US economy is confounding traditional macroeconomic indicators, with the stock market rallying during a recession and the strength of the US economy becoming a potential risk to stocks and overall risk assets.
The tightening of monetary policy by the Federal Reserve, along with negative liquidity cycle effects, is causing concern for asset markets. The deepening negative liquidity downturn is expected to continue, potentially leading to a 900 billion dollar reduction in liquidity provision by the end of the year.
Inflation expectations are leading to increased optimism in the labor market, particularly at the lower end of the income spectrum. This shift in inequalities, where the bottom earners expect higher real wages, may contribute to stronger demand, higher goods inflation, and lower asset inflation. This, combined with a potential U-turn by the Fed, could result in a hard landing for the economy.
Both speakers are bearish on risk assets, particularly US equities and credit. They believe that until earnings expectations align with the reality of slowing growth, the stock market will continue to face downward pressure. They also discuss the potential for a rebound in asset prices once a recession occurs, and the need to maintain a cash position for future investment opportunities.
On today’s episode of Forward Guidance, Jack is joined by two phenoms of macro analysis: Juliette Declercq of JDI Research and Darius Dale of 42Macro. The two explore the likelihood of the Fed’s much-desired “soft landing,” a scenario in which inflation moderates without a severe hit to economic growth or asset prices.
Both Declercq and Dale argue that a soft landing is unlikely and that a fall in inflation will likely require not only a steep selloff in stocks but also a nosedive in economic growth that could amount to a recession. The trio also discuss the natural rate of interest (“R*”), financial repression, and demand destruction.
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Follow Darius Dale on Twitter https://twitter.com/42macroDDale
Follow Juliette Declercq on Twitter https://twitter.com/JulietteJDI
Follow Jack Farley on Twitter https://twitter.com/JackFarley96
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Bit.com is a full-suite cryptocurrency exchange launched by Matrixport, an integrated financial services firm headquartered in Singapore. Since August 2020, Bit.com has been online supporting the spot, perpetual, futures, fixed income and options products, with a particular highlight being pioneers to launch BCH options. Bit.com is the second-largest in the BTC and ETH options market.
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(00:00) Introduction
(00:45) The Most Confusing Times In Macro?
(04:30) How Far Can The Fed Go In Tightening Monetary Policy?
(10:35) Odds Of A Soft Landing
(21:02) What Will It Take To Break Inflation?
(26:20) Bit.com Ad
(26:52) The End Of Free Money
(29:54) Europe
(34:14) Shorting Equities
(38:00) "The Scariest Chart in Macro"
(44:07) Asset Allocation
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Disclaimer: Nothing discussed on Forward Guidance 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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