Macro Update, Educational Tweet, Art(?)
Momentum is real
This will be a quick note but I wanted to share several thoughts…………
The services ISM came out below expectations this morning
This caused equities to sell off and bonds to rally. However, we want to conceptualize these shorter-term moves in the big picture. Inflation is decelerating and the forward curve is beginning to price the probability of rate cuts. This has caused a bid in bonds.
However, there are two things that I am watching. First, consensus and the inflation swap market are pricing a very aggressive decrease in inflation sometime mid-2023 which is unrealistic in my mind. Second, the forward curve is pricing the probability of rate cuts in mid to late 2023. I provided the charts for these in the tweet below.
What does this practically mean? It means that two portions of the market are pricing scenarios that are likely unrealistic unless we have a pronounced rise in credit risk and unemployment. Be sure to keep this scenario in mind! Remember, markets are about scenario analysis (see my previous article).
These potential mispricings are the signals I am watching for a potential bearish move in bonds. Big picture though, as we move into recession, bonds are skewed to the upside. However, we need to be sure to monitor all the short-term risks that can occur.
On the topic of recession,
recently published an exceptional piece showing a preponderance of the evidence that recessionary signals are increasing. I would encourage everyone to read it because it will impact all aspects of life.
Final thing, MOMENTUM
I did a tweet today providing a very simple breakdown of how to think about momentum in financial markets
Why does momentum matter?
If you want a very technical definition, I would read the Origin of Wealth and papers from the Santa Fe Institute. But let’s keep it simple. Momentum in my mind is the reflection of change taking place. Whether we are in financial markets or any job, we are betting our lives, time and money on some type of change. This is why you hear the phrase “adapt or die.” If you are not changing and adapting to the opportunity set in your domain then eventually you will get crushed.
A great example of this is the irrational fear people are having surrounding AI. People think that AI will put them out of a job or ruin their life. In reality, this is because they don’t want to adapt and grow!
Someone I really enjoy watching is this artist on Youtube. He draws the most amazing art! But as we know, AI art is really taking off right now. I really love his reaction because instead of giving up on art he is thinking about new ways to adapt and improve his art. He is an example for all of us, regardless of the domain we operate in.
Technology has always been part of human civilization. The goal is to be able to adapt to the changes, not be crushed by them.
Thanks for reading!
(Big article coming tomorrow, watch out for it!)
great take, thank you, keep it rocking!
Awesome report. Thanks 😊
Hope you can do this report regularly.