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good morning. We thought we wouldn’t write anything until tomorrow, so we and our readers could concentrate on worrying about the CPI report. Undoubtedly, the biggest threat to the risk market is that, despite all, we all could be too optimistic about how much the Fed has to tighten. Inflation reports threaten to revive the dragon’s roar once a month. But CPI isn’t everything, so here’s your newsletter. Contact us by email: [email protected] and [email protected]
Would you like to buy a short end and wait?
Maybe you should ignore Bill Gross at this point?One-time bond king and current bond Ozymandias Retired for several years and admitted (In FT) Longing for love and attention. Perhaps persistent press neglect is good for his soul.But he abandoned the chunk Cham Yesterday it really brought a shark inside me (and others). Starting from his conclusion:
Bonds are at a level where the risk is reduced, but the rewards are negligible. Don’t buy them. Stocks have to fight the disappointment of future earnings and are not as cheap as they look. Don’t buy yet. The product is out of gas. Alternative proposal? … Be patient. The 2.7% 12-month Treasury is superior to money market funds and almost all other options.
Gross’s argument for this position is as follows.
Since the end of the major financial crisis, there has been a large misallocation of capital to large speculative assets, primarily due to artificially low interest rates.
The Fed must return interest rates to neutral to curb inflation. This has already created a bear market, hitting those speculative assets and potentially causing a recession.
The federal funds rate, which only risks a “moderate” recession while lowering inflation, is around 3.5%, but “gets there as soon as possible.”
What that means is that the rapid move to 3.5% and the market / economic downturn it causes have not yet been priced on bonds and equities.So collect your 2.7% (it’s higher) now(Actually) And see where we are next summer. Perhaps we are in the midst of a recession and worse news will be priced.
Gross rate prediction (“faster than 3.5”) Exactly What Federal Reserve To tell That’s what the Fed is trying to do, and that’s exactly what the Fed’s futures market is pricing — it has the Fed at 3.44 percent by December. Therefore, Gross’s point knows what the Fed needs to do and the futures market knows what it is, but the stock and bond markets understand the seriousness of its impact. It means that there is no such thing.
Unhedged agrees that neither stock prices nor credit will spread prices in a mild recession. As we have repeatedly discussed, stock valuation multiples are still too high, given that the earnings estimates that form the denominator of those multiples have not dropped significantly. Spreads have widened significantly and credits may be worth more than stocks, but it’s not surprising as they widen. The market still believes that there is a certain possibility of a soft landing.
An interesting question is whether the best response to this is to sit at the short end of the Treasury curve, limit duration risk, eliminate credit risk, and collect and wait for 3%. I’m not entirely convinced that Gross’s argument isn’t going in the opposite direction. Is long At the end of the Treasury curve, collect 3% and wait. The argument for doing that is that a recession where gross seems pretty certain will reverse the yield curve and push down long yields, and you will make some real money.
What do you say, readers? Which is the better bet in the 12 month period, long end or short end? There is no sissy barbell strategy.
Recession without unemployment?
Is it possible to have a recession and a tight labor market at the same time? So could a significant reduction in production be consistent with something similar to full employment? It sounds strange, but in a way it seems to be happening now. GDP for the previous quarter was -1.5%. And this quarter can also be negative, which seems to meet the roughest definition of a recession. On the other hand, the unemployment rate is 3.6% (very low!), Creating an average of 380,000 jobs per month over the past four months.
It is difficult to combine these facts. Yes, the labor force participation rate and employment / population ratio are 1-2 percent lower than in the pre-coronavirus pandemic. But while it may help explain why employment growth isn’t even stronger, it doesn’t help explain how much more employment can be added while GDP is declining. ..
Yesterday we talked to our favorite Wall Street economist, Don Lismiller of Strategus. He believes that the reason we have never experienced a high-employment recession is that it doesn’t make sense. If production is declining, even if there is a labor shortage, more movement will occur between jobs as people move from the shrinking part of the economy to the growing part. ..The friction of these transitions alone should reduce employment (and we do some of this Gentle rise For unemployed claims, this is like a key indicator).
what happened? Rissmiller had some possible explanations:
One of the ugly possibilities is that strong job creation data is wrong and can be revised downwards. This is bad because, despite the rapid cooling of the economy, false uncorrected numbers can trick the Fed into tightening policies.
New jobs that are currently being created can be low-productivity service jobs that are rarely added to the output. If so, employment should end soon (after all, unemployment is a late indicator).
For example, working from home turned out to mean pretending to work from home, which could be a productivity shock. This seems unlikely, but it cannot be ruled out.
But Lismirer’s main concern is that what’s happening now (whether or not you want to call it a recession) isn’t enough to “reset the cycle” and bring the Fed back. If the current decline in production does not loosen the labor market, or if more workers do not enter the workforce, wage growth will continue to be high, inflation expectations will not subside, and the Fed will tighten. You need to continue. As a result, the recession can expand or double out. This means that good news about the labor market can be bad news for the economy.
This happened in the early 1980s. One recession wasn’t enough to break inflation. Below is a chart of Strategus’ GDP and inflation.
Instead, I want one recession and a short, shallow recession.