EC Why Inflation Isn’t Coming

  1. While at the same time, US option positioning is the most bullish in history (chart via GS).

  1. Citi published a great slide deck last week titled “Investing Under the Money Tree” that attempts to explain some of this phenomenon. First, they point out the futility of average inflation targeting (ait) since it’s not like these bankers have much credibility in that space anyways…

  1. And the Inflationistas that are pointing to how all the money creation is going to spur inflation should have a look at these charts.

  1. The author points out that one of the drivers of this disinflationary world is the fact that the majority of our investment goes into scalable sectors (such as IP, software R&D etc…) where prices tend to go down over time, rather than up.


  1. Instead of credit driving real growth or inflation, it inflates asset prices. This creates an increasingly financialized world where deflationary pressures are actually growing instead of diminishing.

  1. And so we end up with a schizophrenic market. Where most are bearish because, well, our economic trajectory isn’t great. So they sit in large amounts of cash and safe assets. But… since there’s little to no return on these assets, they’re forced to allocate increasing amounts of their portfolio further out the risk curve. A kind of barbell approach, which is why call options are being bought and we have the “largest long risk ever in the Global CDS market” (chart via BofA).

  1. This is why the value factor has performed so poorly. In fact, it’s seen its worst 10-year run in history (chart via BofA). Value needs strong nominal growth to outperform.

  1. BofA points out that “A few key macro variables explain the ongoing mortification of value stocks. The 10-year Treasury yield, the ISM Purchasing Managers Index, and the 5-year forward 5-year inflation breakeven rate account for 79% of the variation in growth vs. value in recent decades.”
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Disclaimer: All statements are solely opinions and are for educational purposes only.

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