Looking forward to your notes. I'll admit that I have trouble following your logic, at times. I think you're moving about 100 mph, but I can only manage to think at about half that speed. Maybe, on this format, you'll be able to explore your thoughts more fully, so half-wits, like me, might understand. ;-)
Thanks John, and sorry for the delay (I probably shouldn't admit this but I am *such* a tech dummy I didn't even see that my posts had comments until today - when I say "please bear with the Cloudbear" I mean it can be reaaaally bear with me :-) ) ... that's my hope is to be able to elaborate and flesh out certain themes and ideas for a bit broader access!
I can tell you that as an institutional peon that I'm fighting this fight and nobody wants to listen. Same people that had the "a recession is guaranteed in 2023" nailed onto the wall.
If I'm being totally fair I have been Waiting for Godot on recession myself, thought it would be later than most (late 23/1H24) and yet here we are about to run hot and potentially overheating again as we work through 2024...
There are some very nice risk/reward plays to pay whites and reds now to express this view.. can also structure trades in fwd ZC inflation swaps that appeal
At this point I've had enough frustrations with steepeners that I'm tempted to keep it suuuuper simple and just continue to smash the long end outright.
Agreed - cheap is good and not sure who was buying 30 years sub 4% - outside of Covid 2.0, with a funds rate below 2, the 30 year stays above 4%. I look forward to the inflation hedge bros!:)
Thx Paulo for the great work. Wanna clarify the logic behind having a higher long end and then equity bull. Any conflicts or I am just too stuck with traditional logic? Which level is the short end do u expect in such scenario? Thank you.
So I will elaborate on this soon in a future note but I sense the correlation between equities and bonds is breaking down into something more akin to the QE era (bonds down/equities up) but it's not Risk On Risk Off the way we knew it 10 years ago. I could be wrong, I know thinkers like Constan disagree and most are firmly in the "equities and bonds trade together" camp at this point. It's just a sense I have, but it ties into Equities becoming the safety trade for Inflation Hedge Bros. Nominal bonds fail miserably but "equities do great because pricing power"
One way we have yields affect stocks is through multiplier expansion. For growth stocks, all else equal, lower yields means time value of money lower, means future earnings are worth more in today's dollars so you're willing to pay more -> stock price up. This is what we've seen in, e.g., tech for a long time.
But if we have more inflation, then you care about cash flows because companies with cash flow can adjust up their pricing to continue earning margins.
Or another way to view this is that when you have inflation, the value of money and money-like assets goes down (higher duration is bad, and growth assets are higher duration). You want to own both scarce things (commodities, potentially, because they can't be printed like dollars can) and "productive" capital. What is productive capital? It's probably not vaporware. It looks like something that produces new economic output in each time period -- the things people want tomorrow and will buy even as the price inflates.
It will be interesting to see if the new (fiscally distributed) money that eventually flows into financial assets (including equities as an inflation hedge) continues to believe in the growth narrative, or if it shifts toward productive capital.
I touched upon this in the next note on surfing commodity rallies but with a few exceptions I keep finding myself wanting to be as close to the physical as possible (uranium being just one recent example that I wrote about on X).
Looking forward to your notes. I'll admit that I have trouble following your logic, at times. I think you're moving about 100 mph, but I can only manage to think at about half that speed. Maybe, on this format, you'll be able to explore your thoughts more fully, so half-wits, like me, might understand. ;-)
Thanks John, and sorry for the delay (I probably shouldn't admit this but I am *such* a tech dummy I didn't even see that my posts had comments until today - when I say "please bear with the Cloudbear" I mean it can be reaaaally bear with me :-) ) ... that's my hope is to be able to elaborate and flesh out certain themes and ideas for a bit broader access!
Such a better format to followand digest your thoughts! Much success for this new endeavor!
thanks so much! Off to a fun start so far and hopefully of interest!
I can tell you that as an institutional peon that I'm fighting this fight and nobody wants to listen. Same people that had the "a recession is guaranteed in 2023" nailed onto the wall.
If I'm being totally fair I have been Waiting for Godot on recession myself, thought it would be later than most (late 23/1H24) and yet here we are about to run hot and potentially overheating again as we work through 2024...
There are some very nice risk/reward plays to pay whites and reds now to express this view.. can also structure trades in fwd ZC inflation swaps that appeal
Idk what any of that meant but it sounded great.
At this point I've had enough frustrations with steepeners that I'm tempted to keep it suuuuper simple and just continue to smash the long end outright.
Agreed - cheap is good and not sure who was buying 30 years sub 4% - outside of Covid 2.0, with a funds rate below 2, the 30 year stays above 4%. I look forward to the inflation hedge bros!:)
They are coming...
Thx Paulo for the great work. Wanna clarify the logic behind having a higher long end and then equity bull. Any conflicts or I am just too stuck with traditional logic? Which level is the short end do u expect in such scenario? Thank you.
So I will elaborate on this soon in a future note but I sense the correlation between equities and bonds is breaking down into something more akin to the QE era (bonds down/equities up) but it's not Risk On Risk Off the way we knew it 10 years ago. I could be wrong, I know thinkers like Constan disagree and most are firmly in the "equities and bonds trade together" camp at this point. It's just a sense I have, but it ties into Equities becoming the safety trade for Inflation Hedge Bros. Nominal bonds fail miserably but "equities do great because pricing power"
My understanding...
It's easy to understand why higher inflation / growth -> higher yields.
Re stocks:
One way we have yields affect stocks is through multiplier expansion. For growth stocks, all else equal, lower yields means time value of money lower, means future earnings are worth more in today's dollars so you're willing to pay more -> stock price up. This is what we've seen in, e.g., tech for a long time.
But if we have more inflation, then you care about cash flows because companies with cash flow can adjust up their pricing to continue earning margins.
Or another way to view this is that when you have inflation, the value of money and money-like assets goes down (higher duration is bad, and growth assets are higher duration). You want to own both scarce things (commodities, potentially, because they can't be printed like dollars can) and "productive" capital. What is productive capital? It's probably not vaporware. It looks like something that produces new economic output in each time period -- the things people want tomorrow and will buy even as the price inflates.
It will be interesting to see if the new (fiscally distributed) money that eventually flows into financial assets (including equities as an inflation hedge) continues to believe in the growth narrative, or if it shifts toward productive capital.
good points!
Would love to hear more insights on your 5 bucket positionining... particularly Small Caps and Low Multiple EM!
definitely intend to elaborate more on this behind the paywall. More flexibility there now!
Great post. Thank you!
thanks a lot!
Great read Paulo ! In commodities would prefer physical or equities . I am long XLE since last week
I touched upon this in the next note on surfing commodity rallies but with a few exceptions I keep finding myself wanting to be as close to the physical as possible (uranium being just one recent example that I wrote about on X).