Will Janet Yellen Pull the Trigger? | Andy Constan
Mar 24, 2022
01:03:22
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Quick takeaways
A balanced portfolio is still favorable despite concerning factors in the marketplace, such as inflation and the actions of the Fed, due to expectations for growth, expectations for inflation, risk premiums, and flow in positioning.
The main drivers of risk premiums are expectations for growth, expectations for inflation, and the impact of supply and demand dynamics on asset prices, with portfolio volatility and individual asset volatility playing a significant role in influencing risk premiums.
The potential impact of quantitative tightening (QT) on asset prices depends on factors like the maturity profile of the Federal Reserve's treasury holdings, the need to sell mortgages, and different scenarios involving the US Treasury's issuance of bonds and bills.
Deep dives
Current environment is favorable for balanced portfolios
The speaker believes that the current environment is favorable for owning a portfolio of assets that are balanced for inflation and growth. Despite concerning factors in the marketplace, such as inflation and the actions of the Fed, the speaker asserts that a balanced portfolio is still favorable due to expectations for growth, expectations for inflation, risk premiums, and flow in positioning.
Framework for risk premiums and quantitive easing
The speaker discusses a framework for understanding risk premiums and their connection to quantitative easing (QE). They highlight the main drivers of risk premiums, including expectations for growth, expectations for inflation, and the impact of supply and demand dynamics on asset prices. The speaker also explains the role of portfolio volatility and individual asset volatility in influencing risk premiums.
Analysis of quantitative tightening and treasury issuance
The speaker delves into the topic of quantitative tightening (QT) and its potential impact on asset prices. They describe a QT tracker that predicts the rollout of QT and its potential intensification. The speaker analyzes the factors influencing QT, including the maturity profile of the Federal Reserve's treasury holdings and the need to sell mortgages. They also discuss the role of treasury issuance in funding the US deficit and the potential consequences of different scenarios involving the US Treasury's issuance of bonds and bills.
Short and long-term outlook on risk assets
The speaker shares their outlook on risk assets across different timeframes. In the short term, they express a bullish position on owning bond and stock assets, while also monitoring information related to QT. For the medium term outlook, the speaker emphasizes the importance of upcoming data regarding QT and its potential impact on risk assets. In the long term, the speaker believes in diversification across different assets to balance growth and inflation, with a particular focus on China and the United States as potential regions for finding balance in a portfolio.
Understanding inflation and inflation expectations
The speaker provides insights into inflation and inflation expectations. They discuss the factors driving inflation, including supply shocks, fiscal spending, population dynamics, and currency devaluation. The speaker views the recent sharp spike in inflation as partly influenced by supply chain disruptions and expects inflation to gradually trend down in the long term. They also highlight the impact of inflation on various asset classes and the relationship between demand-side factors, wage-price spirals, and interest rates.
In today's episode of Forward Guidance, Andy Constan joins Jack to discuss the latest in financial news, reflecting on the Fed while discussing topics like market plumbing, roll-downs, and more. Andy Constan injects his absolute expertise of the subject matter into this interview-- you won't want to miss it.
Follow Andy Constan @dampedspring
Follow Jack Farley @JackFarley96
Follow Blockworks @Blockworks_
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