Before we get into today's piece, shout out to Macrodesiac partner Syscoin.
War fatigue looks pretty well-established in markets now. Headlines are barely moving the dial.
The risk backdrop is p*ss-poor in every direction. More disruption to supply chains and the current order of play seems likely.
China's economy might not withstand a global slowdown. Especially with a weakening property market, lockdowns and a potentially less globalised world.
Low rates forever? Maybe. But with inflation way above target right now, it's not the 'sure thing' it once was...
Markets are betting that the 'terminal rate' (estimate of the highest interest rate that an economy can withstand, or the interest rate that is consistent with full employment and capacity utilization and stable prices) will be higher than the 2% or lower that was previously assumed 👇
Using Eurodollar futures, the increase in US terminal rate expectations from January to March has also been pretty dramatic.
Why should I care about the terminal rate?
It sounds dull and dreary. Probably because it IS dull and dreary.
But these expectations affect asset pricing. Here's the thinking.
If the terminal rate is expected to be 2.5%, then the US 10 year yield will likely reach 2.5%.
The US 10 year yield is the benchmark risk-free rate to price all other assets against.
The Risk-Free Rate is the theoretical rate of return received on zero-risk assets, which serves as the minimum return required on riskier investment.
In plain English, if an investor can earn 2.5% "risk-free" by parking their cash in treasury bonds, riskier investments needs to promise more attractive returns to convince an investor to take those risks.
In a world of higher rates, sticky inflation/stagflation, and potentially higher commodity prices, who's going to invest in the most speculative growth names...
Unless they get a deep discount of course... 80% off could be a decent deal 👇
Maybe there will be permanent changes to the world on the back of this conflict.
Maybe some new alliances?
A Multi-Polar, less globalised world doesn't seem so far-fetched amid the chaos.
On that note, this is well-worth a listen. 👇
Marko Papic is great at cutting right through the BS and getting to the point.
He thinks a Russia/Ukraine deal could be brokered within the next two/three weeks.
If he's right, and a peace deal with a guarantee of neutrality is brokered, what does that mean for the sanctions?
Politically speaking, it's far easier to impose them than it is to remove them...
If Russia withdraws, they'll be looking for something in return from the West too.
"Build your opponent a golden bridge to retreat across." — Sun Tzu
(Sun Tzu didn't actually say that, but it sounds better than the original)
Has the West thought about the implications of continuing to pressure Russia?
If he's backed into a corner, upping the economic costs on the West, & especially Europe will be tempting.
Putin might not be the only one in need of a golden bridge...
Have we seen a stock market bottom?
“Because sentiment is already so negative, that bottom could come sooner than you’d think,” - Jim Cramer
Jimmy's predictions are usually pretty terrible, but I've been thinking the same about sentiment recently.
Maybe he can be right for a change. At least until the Fed do their thing tomorrow...
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