Epsilon Theory Professional
In times of profound informational need – like today when we *really* need to know if inflation is embedded in the real economy – we are desperate for data that will allow us to act with conviction. But the nature of our macro data construction guarantees we will get less accurate results during these times where we need accuracy the most.
As the kids would say, it’s just math.
Multiple not-seen-in-a-quarter-century events have occurred over the past six weeks in rates-world. The lack of narrative attention is striking, as are the implications for the next few quarters across markets.
I believe that it is impossible in a robust, ie, non-financialized and non-levered macroeconomic world, for a nation’s people to be a lot richer than their economy grows.
But that’s where we are.
It feels weird to be rooting for a Volcker-esque recession and long bear market as the best potential outcome for where we are today. But there are worse outcomes, like Weimar or war. And it feels like those much worse outcomes are squarely on the path of least political resistance.
We have two new narrative signals here in June, both Bullish in direction, which is a welcome change from the largely uniform Bearish signals of April and May.
But both on the surface and beneath the surface, there is an enormous amount of conflict and churn happening in narrative-world. Time to trim the risk sails.
For a solid two years, call it early 2011 through early 2013, comparative euro-area gov’t bond yields was the first chart I’d look at in the morning and the last chart I’d look at in the evening.
Time to start doing that again.
If there’s one common knowledge narrative that I think can break over the coming months, it’s But The US Consumer Is Strong! ™.
I’d like to tell you that our Narrative Monitors are not as bearish for May as they were for April.
Yep, I’d really like to tell you that.
The big global risk today is not that the banks are undercapitalized. No, the big global risk today is that banks are unwilling to provide long-term financing for anything. The big global risk today is that we are only in the early innings of a profound deleveraging cycle.
The narrative puts and takes of March (and the resulting market rollercoaster) have coalesced into no puts and all takes. This is about as bearish a set of narrative signals for risk assets as we’ve had in a long time.
I personally thought what Powell said in his presser today was market-negative. But who cares what I think! What matters is how market participants are geared to interpret what Powell was saying, and our narrative machine clearly showed they would interpret it positively. No matter what he actually said.
In commodity markets, crypto markets, and equity markets … we’re all sardine traders now.
I don’t think the proposed Russia sanctions are likely to trigger a systemic financial crisis, and I think Putin’s nuclear saber-rattling is posturing for Ukrainian settlement negotiations. I really don’t see the path to a global crisis here. Famous last words, I know …
The structure of a market narrative isn’t as settled or as constructed as a Hollywood script, but it’s not too far off, either.
We’re in Act Three of the inflation narrative.
I am a shortseller by nature and (former) profession. Like my favorite comic book character, Karnak the Inhuman, my superpower is to see the flaw in all things, which doesn’t exactly make me much fun at cocktail parties but is a (sometimes) valuable skill for a portfolio manager.
So here’s my perspective on what’s happening … one big place where my spidey-sense is tingling and one big place where it’s not.
You know who understands how inflation absolutely wrecks the popular support of any government? The Fed.
You know who doesn’t get it? You know who doesn’t get it AT ALL? The White House.