Discover more from Value Investing Substack
✨ Macro Dream Team: Lyn Alden, Danielle DiMartino Booth, Stephany Pomboy & Ivy Zelman
“If you can keep your head when all about you, Are losing theirs and blaming it on INFLATION - You'll see the whites of the eyes of DEFLATION" ― If: An Economist's Advice to Investors
An excellent US Macro interview with some of the most respected economists in the land:
<Interview was published on 25 Feb 2022, before latest inflation print>
2-10 spread is narrowing rapidly (40bps).
Only 20% of committed PE capital for real estate has been allocated so far, putting pressure on supply side.
Recent swings in household spending has coincided almost 1:1 with govt distributions (e.g. CARES, stimulus cheques). The latter assistance has already ended, which could mean US consumer isn't as strong as inflation implies going forward.
50% of the $2.6T in cash held by S&P500 companies is really held by just the top 10 companies. Half of the investment grade companies should be in junk territory.
Even as equity markets melted upwards in a frenzy (e.g. Dow +600 points), the corporate credit market continued its deterioration. This is exactly like 2007, as ABS seized up even as equity markets surged.
Could be make-or-break for zombie companies who have to roll over commercial paper at 50bps higher.
LQD outflows (corporate bonds) outpacing HYG outflows (high yield). New issuance is going crazy, which is being justified by D/E ratios looking so much better... Got Profits?
Jay Powell may already be seeing the whites of the eyes of a recession... he's a credit guy. He might be willing to let equity markets go as long as credit doesn't break. A lot is outside of Jay Powell's control right now.
CPI vs PPI spread (2.2%) has never been this extended in history except for 1974 (oil embargo, Nixon's resignation), implying companies are having trouble passing on price increases - which may invite a profit recession. This is in stark contrast to market forecasts of 8% consumer growth, and 40% forecasted consumer discretionary growth.
Extended debt to GDP (120% govt, 80% household) means that Fed has little room to raise interest rates. While the USD may be a reserve currency and Fed can still print, currency depreciation remains an issue.
Click the box above to check out my thoughts on US Inflation (written in Sept 2021). I’m planning to write an update to this article soon… if you want to get notified when it comes out, Subscribe for free below!
If you like what you’ve just read, gain access to our entire catalog of ASEAN stock ideas with a subscription at just $9.90/month… for 2x ASEAN stock reports per month!