Mortgage rates have risen faster this quarter than they have in decades and the Fed hawks are firmly in the driver’s seat. Will this cause a hard landing in housing? Comparisons with the 2008 Global Financial Crisis argue that it will not. Back then, housing was overbuilt and financially fragile households used subprime loans to buy homes. The chart shows that this time around the credit quality of the marginal buyer is much better. No doubt, irresponsible lending has begun to occur, but not enough to have a macro impact.
Read MoreThe chart shows that volatility has increased across all capital markets (Chart 2). Geopolitical and monetary policy “noise” after a period of calm during the pandemic is forcing investors to considering various tail risks that may or may not happen. Despite this noise, four investment themes stand out. First, the tough Fed stance will protect the long end of the bond market and anchor long-term inflation expectations. Second, high energy prices are here to stay, even if geopolitical tensions subside. Third, an eventual buying opportunity is shaping up in growth stocks, including technology, likely in the second half of this year. Fourth, residential real estate is attractive if a correction unfolds as the Fed tightens.
Read MoreThe Russia/Ukraine conflict is unleashing a stagflationary impulse on the world economy. This creates a dilemma for fixed income investors. Should portfolio managers pay more attention to rising inflation and be underweight duration? Or should they focus on weakening growth and be overweight duration? In our latest Global Fixed Income & Currency Strategy report, we make the case that investors should place greater weight on growth over inflation.
Read MoreOur U.S. Bond Strategy service gradually transitioned last year from aggressively overweight to underweight in corporate bonds. This recommendation proved to be opportune, at a time when the consensus believed that healthy corporate profits, economic momentum and a vanishingly low default rate would keep the sector well bid. Spreads have widened sharply this year, but we believe that credit is still not priced for the coming mean-reversion in defaults in 2022. Find out more in this report.
Read MoreThe Fed is obsessed with surging actual inflation, but the chart shows that the long-term inflation breakeven rate is more important for intra-equity trends such as global cyclicals/global defensives and small caps/large caps. This rate still has a center of gravity around 2%. The best-case scenario for equities is “more of the same”. An upside breakout would deepen Fed worries that they have “let the inflation genie out of the bottle” and increase the odds of an equity meltdown. A more significant risk off the radar screen of equity investors is that long-term inflation expectations fall below 1.5% as the Fed tightens and the economy slows. That would make for a difficult corporate pricing power environment and undermine global cyclicals, small caps, highly-leveraged companies and momentum stocks.
Read MoreThe chart shows that yield curve flattening, proxied by the 10-year versus 2-year yield spread, has been driven by a divergence in short-term versus long-term expected inflation prospects, which creates the potential for corporate sector disappointment. In contrast with the divergence in expected inflation, real yields have had a parallel upward shift along the curve. The threat to equities stems from the fact that the Fed wants to jack up interest rates because of a short-term inflation scare, even though pricing power is limited by tame longer-term inflation expectations. Ergo, rosy consensus profit estimates are vulnerable to downgrades. For example, the Bloomberg 2022 consensus forecast for S&P500 EPS growth is 17%.
Read MoreOur bond models are summarized by a Risk Indicator. This consists of three subcomponents: cycle, value, and momentum. A high risk reading is bearish for bonds, and vice versa. The models are a key input to our call on duration and global fixed income country allocations. What’s the message from our models after the recent rise in bond yields? Which countries have the best risk profile?
Read MoreThe late and distinguished economist Rudi Dornbusch is known to have said that economic expansions do not die of old age; they are murdered by the Federal Reserve. Is the Fed running the risk of being overzealous in tightening policy? And importantly, where should investors look for signs that a recession is on the horizon?
Read MoreAlpine Macro are on the record as “crypto sceptics”. The crypto craze has elements of a classic Dutch Tulip mania, or the late 19th century Gold Rush, when everyone went to the Klondike to get rich but they did not know what they were doing. However, blockchain technology also could lead to a huge wave of innovations accompanying the bubble. Speculation can be in tulips, which completely crash and burn and is a pure Ponzi scheme, with no real value proposition. But it can also be in canals, railroads, cars or the Internet. The latter type of mania also crashes and burns, as occurred with tech after the late 1990s bubble. But the bullish fundamental story plays out in installments and eventually changes the world. Investors need to understand the value proposition or they can lose plenty of money, as they did with the NASDAQ after the tech bubble burst, even if the underlying infrastructure is a game-changer. Stay tuned.
Read MoreOil prices are near multi-year highs, but the futures curve predicts a “return to earth” in 2022. We disagree. One reason is that we expect the expanded OPEC+ group of 23 countries, including Russia, to remain disciplined. The Chart shows that OPEC production outside the Middle East is set to shrink, concentrating power in the hands of a few countries. Another reason is that U.S. shale producers will have to ramp up drilling to even increase production moderately, after having used up their inventory of drilled but uncompleted wells (DUCs). On balance, $80 WTI is more likely to be a floor than a ceiling in 2022.
Read More