Florian great article. Do you think we will persistently be in these short bursts of inflation-recession cycles this decade?
Also do you see some type of yield curve control-like tool being coordinated among the large central banks at some point over this potentially inflationary decade? (Ie. High debt loads and high inflation are a tough mix to handle together, and it is still hard for me to see nominal yields rising above 4-5% without serious impairment of the financial system.)
Good question. I think it's likely we'll see a fast cycle now, very hard to tell further into the future. The debt load is definitely an issue in Europe/UK, less so in US where private sector delevered a lot if you include cash balances. Think aversion against inflation is extremely high, so would rather imagine some creative solution and/or debt restructuring rather than CBs accepting high inflation in the long run with YCC. This is very speculative though!
Thanks for your reply Florian. I hear you - I used to be in the YCC camp but starting to doubt it is needed. We are seeing rates do not need to go anywhere near as high as CPI to slowdown the economy / cause sufficient demand destruction to bring inflation down. Makes me think it's more likely we go though inflationary and recessionary bursts, but like you said further into the future is harder to call.
Rents in the US are still rising. That can't hurt rental RE valuations. On the other hand, if Treasuries yields rise, that could put a big hurt on cap rates.
thank you for another great read! my sister alissa recommended and now my dad, myself and her are all avid readers. my dad printed out the UK article for me specifically to make me read it!
That's very nice to hear, thank you :) Not much further insight into the UK, though one thought is that the UK will have a harder time to run a restrictive monetary policy, which will likely mean higher inflation than elsewhere. This could express itself in more downside for GBP and less nominal (!) downside for housing
Thanks for a terrific write-up again. Re your short position in banks - dont you think that rising rates should greatly benefit their earnings? And valuations arguably already discounting a recession & B/S in much better shape than in the past?
Think rates might stall from here so no more tailwind from that, and then you'll see credit losses impact earnings negatively. Not priced in yet IMO. Agree better B/S today
Really interesting work. What metrics are you looking for to confirm when the inventory glut has been worked off and a new upcycle can begin? Explicitly waiting for the Fed to pause on QT or looking closer to Philly 6m ahead index & ISM new orders / inventories ratio?
Thank you. Would look at ism new orders and NAHB survey for upcycle leads. Fed obv too, if precedes this
Florian great article. Do you think we will persistently be in these short bursts of inflation-recession cycles this decade?
Also do you see some type of yield curve control-like tool being coordinated among the large central banks at some point over this potentially inflationary decade? (Ie. High debt loads and high inflation are a tough mix to handle together, and it is still hard for me to see nominal yields rising above 4-5% without serious impairment of the financial system.)
Thank you!
Good question. I think it's likely we'll see a fast cycle now, very hard to tell further into the future. The debt load is definitely an issue in Europe/UK, less so in US where private sector delevered a lot if you include cash balances. Think aversion against inflation is extremely high, so would rather imagine some creative solution and/or debt restructuring rather than CBs accepting high inflation in the long run with YCC. This is very speculative though!
Thanks for your reply Florian. I hear you - I used to be in the YCC camp but starting to doubt it is needed. We are seeing rates do not need to go anywhere near as high as CPI to slowdown the economy / cause sufficient demand destruction to bring inflation down. Makes me think it's more likely we go though inflationary and recessionary bursts, but like you said further into the future is harder to call.
Rents in the US are still rising. That can't hurt rental RE valuations. On the other hand, if Treasuries yields rise, that could put a big hurt on cap rates.
thank you for another great read! my sister alissa recommended and now my dad, myself and her are all avid readers. my dad printed out the UK article for me specifically to make me read it!
Do you any further insights on the UK residential housing market? are there higher supply imbalances vs. other OECD countries? Some UK homebuilders predicting this to widen: https://www.ft.com/content/72839c2c-81af-43a5-beb1-047b25d80a66
That's very nice to hear, thank you :) Not much further insight into the UK, though one thought is that the UK will have a harder time to run a restrictive monetary policy, which will likely mean higher inflation than elsewhere. This could express itself in more downside for GBP and less nominal (!) downside for housing
Thanks for a terrific write-up again. Re your short position in banks - dont you think that rising rates should greatly benefit their earnings? And valuations arguably already discounting a recession & B/S in much better shape than in the past?
Think rates might stall from here so no more tailwind from that, and then you'll see credit losses impact earnings negatively. Not priced in yet IMO. Agree better B/S today
Really interesting work. What metrics are you looking for to confirm when the inventory glut has been worked off and a new upcycle can begin? Explicitly waiting for the Fed to pause on QT or looking closer to Philly 6m ahead index & ISM new orders / inventories ratio?