Stocks To Keep Heading Higher Until Inflation Starts Rising Again | Bloomberg's Simon White
Dec 26, 2023
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Simon White, Macro Strategist at Bloomberg, discusses the current outlook for the global economy and financial markets. They explore the challenges posed by the uneven recovery of different sectors, analyze the possibility of returning to normalcy post-pandemic, and assess the impact of the Federal Reserve's balance sheet on the economy. They also discuss the Fed's rate decisions, the liquidity outlook for next year, and the importance of understanding technology and AI as non-financial investments.
The positive outlook for risk assets in the next few months is attributed to liquidity tailwinds, which make significant sell-offs challenging and gradual increases likely.
The ongoing recovery from the pandemic has disrupted standard analysis as different sectors of the economy recover at different rates, posing risks of a delayed recession and the potential impact of rising rates in the second half of the year.
Excess liquidity, influenced by factors like money growth and fiscal deficit management, plays a significant role in supporting risk assets while the return of inflation and unforeseen credit market events pose potential risks.
Deep dives
Liquidity Tailwinds Supporting Risk Assets
The speaker explains that the outlook for the next few months is positive for risk assets due to liquidity tailwinds. The support from liquidity makes it difficult for risk assets to experience significant sell-offs and instead, they are expected to gradually increase. However, the speaker highlights the inflation as a potential risk in the second half of the year, which could impact the market dynamics.
Recovery from the Pandemic and Out-of-Sync Cycles
The speaker discusses the ongoing recovery from the pandemic and how it has disrupted standard analysis. Different sectors of the economy, goods, and services, have been recovering at different rates, causing confusion in predicting recessions. While goods and services economies have not contracted simultaneously, avoiding a full-blown recession, the speaker warns of the risks of a delayed recession and the potential impact of rising rates in the second half of the year.
The Role of Liquidity in Asset Prices
The speaker emphasizes the significant role of liquidity in asset prices. Excess liquidity, influenced by factors such as money growth, dollar weakening, and favorable fiscal deficit management, has been supportive of risk assets and led to their positive performance. The speaker explains that the liquidity outlook for the next few months remains positive, providing a supportive environment for risk assets. However, the potential return of inflation and unforeseen events in credit markets pose risks that could alter the market dynamics.
Central bank independence becoming blurred
The podcast discusses how the concept of central bank independence is becoming less distinct. Historically, central banks have been seen as an arm of the state rather than truly independent entities. While central bank independence has been valued in recent decades due to its role in maintaining low inflation, the current context of high inflation and large fiscal deficits suggests a blurring of the lines. The government's fiscal situation and the potential impact on central bank policy raise questions about the future of central bank independence.
Rising interest rate expense and potential credit market troubles
The podcast highlights the growing interest rate burden on the government and the potential risks it poses. As interest rates rise, the government's interest rate expense increases, leading to more borrowing and potentially impacting the national debt. This rise in interest rates could also influence liquidity in the system, limiting velocity and reducing reserves. The concern is that an increase in interest rate expense could result in credit market troubles, as bad loans and defaults become more likely. These risks, coupled with potential exogenous factors, could push the economy into recessionary territory, making credit spreads and the health of the credit market crucial factors to monitor.
Wall Street was extremely pessimistic heading into 2023, and the year surprised to the upside.
Here at the end of the year, markets are now brimming with optimism and the S&P is trading at an all-time high.
Is the momentum likely to continue?
Or will 2024 be another surprise year for investors, this time to the downside?
For an analyst's perspective, we turn to Simon White, Macro Strategist at Bloomberg and co-founder of the investment-advisory firm Variant Perception.
ACT SOON! SUBSCRIBE to Adam's new Substack at https://adamtaggart.substack.com/ to get his Adam's Notes for all the recent experts who have appeared on this channel. But do so before the price increases on Jan 1st 2024!
#inflation #bullmarket #liquidity
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