Hi Florian, interesting take. I noticed you never mentioned services and wages inflation. How would it go down if unemployment doesn't increase? What would the Fed do if core inflation sticks to a 3.5-4% range? I feel this is a missing puzzle piece in your otherwise bold take (bold since other smart people believe summer is when the recession finally accelerates).
Sure, if unemployment doesn't go up then services inflation will stay elevated. It is to some degree cyclical, but agree that would be an issue. The Fed would hike further, I believe I refer to this in the previous piece
You did, you specifically pointed to a "...lack of demand [for credit] due to prohibitively high rates."
And that is exactly the reason why I had not changed my more bearish perspective, even though I tend to doubt myself frequently, it always goes back to the fed.
If unemployment does not increase, inflation stays entrenched at least at around 4% levels as goods deflation should end in 1 or 2 quarters.
Under that scenario the fed will at the very least keep rates at current levels for the foreseeable future.
The repricing of most of the CORP-REIT-PE debt load should be done in roughly 5 years but a significant portion of those business models are not workable at current rate levels/Capital Structures and a process of deleveraging should ensue (either orderly or through defaults) and that process should be accompanied by a significant hit to the labour market.
The risk to this view is that much more of that repricing needs to happen before the pressure builds to a sufficient level to start that deleveraging process (long and variable lags) and during that period there might be a cyclical recovery that reward bulls at least for a period.
But today you are being paid close to 6% to wait in very short-term investment grade debt.
You mentioned ISM manufacturing having good correlation with russell 2000. Why you choose ISM rather than Markit? You think ISM more accurate than Markit?
Nice thesis for a soft landing. Profit margins are declining, but if unemployment rises only a little bit until the next cycle possibly starts in summer, the Fed would have achieved their well communicated soft landing. Of course a lot of IFs, but not impossible at all.
Florian, you mentioned you are investing in Chinese tech stocks. Do you consider their accounting practice, nationalization by the state, risk factors?
Luke Gromen made the point that high interest rates IN-crease inflation (high debt level -> high income for private sector). This and your expectation of economy turning would mean Fed will have to increase rates even further?
Hi Florian, interesting take. I noticed you never mentioned services and wages inflation. How would it go down if unemployment doesn't increase? What would the Fed do if core inflation sticks to a 3.5-4% range? I feel this is a missing puzzle piece in your otherwise bold take (bold since other smart people believe summer is when the recession finally accelerates).
Sure, if unemployment doesn't go up then services inflation will stay elevated. It is to some degree cyclical, but agree that would be an issue. The Fed would hike further, I believe I refer to this in the previous piece
You did, you specifically pointed to a "...lack of demand [for credit] due to prohibitively high rates."
And that is exactly the reason why I had not changed my more bearish perspective, even though I tend to doubt myself frequently, it always goes back to the fed.
If unemployment does not increase, inflation stays entrenched at least at around 4% levels as goods deflation should end in 1 or 2 quarters.
Under that scenario the fed will at the very least keep rates at current levels for the foreseeable future.
The repricing of most of the CORP-REIT-PE debt load should be done in roughly 5 years but a significant portion of those business models are not workable at current rate levels/Capital Structures and a process of deleveraging should ensue (either orderly or through defaults) and that process should be accompanied by a significant hit to the labour market.
The risk to this view is that much more of that repricing needs to happen before the pressure builds to a sufficient level to start that deleveraging process (long and variable lags) and during that period there might be a cyclical recovery that reward bulls at least for a period.
But today you are being paid close to 6% to wait in very short-term investment grade debt.
You mentioned ISM manufacturing having good correlation with russell 2000. Why you choose ISM rather than Markit? You think ISM more accurate than Markit?
Dont have same history for s&p global…
Excellent analysis, thanks!
Agree with A.I, would wait for the laggards to start catching up, though.
Yes, KWEB will be the place to be, sooner or later.
https://martinschwoerer.substack.com/p/bubble-bubble-artificial-trouble
KWEB is as of now (according to my system) a buy.
Nice thesis for a soft landing. Profit margins are declining, but if unemployment rises only a little bit until the next cycle possibly starts in summer, the Fed would have achieved their well communicated soft landing. Of course a lot of IFs, but not impossible at all.
Thank you, yes agree many IFs...
If manufacturing turns, this should also pull up commodities later this summer?
Agree, that's the idea
Florian, you mentioned you are investing in Chinese tech stocks. Do you consider their accounting practice, nationalization by the state, risk factors?
Luke Gromen made the point that high interest rates IN-crease inflation (high debt level -> high income for private sector). This and your expectation of economy turning would mean Fed will have to increase rates even further?