The #1 rule about outlooks

fed reserves vs spx
  • The biggest surprise of 2023 was not the resilience of the US consumer
  • It was that central banks added nearly $1tn in liquidity, rather than removing $1tn as had been widely expected.
  • This swing alone is worth 20% on equities – almost exactly the YTD gain in the S&P.
  • We think 2024 will show central banks have overtightened rates whilst simultaneously overstimulating risk assets.
  • But we also fear their misunderstanding of the dynamics means they may yet do more of both.

Central bank liquidity update

6m central bank liquidity vs equities
  • Poor risk asset performance in Sep/Oct reduces gap to CB liquidity
  • Fed $300bn reserve increase over past eight weeks helps explain renewed rally in S&P
  • Conversely, despite talk of stimulus, China liquidity injections remain lacklustre
  • Liquidity outlook still driven by RRP – and is much less negative than might be expected

The mind-bending maths of fiscal financing

us debt vs rate levels
  • Persistent fiscal deficits are increasingly cited as the #1 reason to short bonds
  • But the historical record is remarkably and perplexingly clear
  • High debt levels, and even high fiscal deficits, have historically been associated with bond yields falling, not rising
  • Only in part does this reflect factors like financial repression
  • It is also due to the counterintuitive nature of the credit creation process itself

Don’t blame QT for the bond backup (free to view)

QE vs 10y UST nominal
  • It is often said that QE held down bond yields, meaning QT should be a major contributor to this year’s rise
  • But the evidence for this is deeply questionable
  • QE does indeed hold down real yields, through a portfolio balance effect
  • But it also pushes up inflation breakevens via signalling
  • What is missing so far from this round of QT is the historical fall in breakevens
  • The true driver of higher bond yields lies with inflation, not QT

Central bank liquidity update

central bank liquidity vs equities
  • CB liquidity still a better explanation of risk asset performance than many fundamentals
  • H1 liquidity injections now fading
  • Market performance – despite some prior ‘excess’ – largely fading in line
  • Prospects mostly negative but depend on RRP, BoJ and explanation for the prior ‘excess’

Distributional accounts

bottom 50pct real net worth

This is a test of various chart sizes. Deposits – especially in real terms – have been falling sharply, and those for the bottom quintiles are now back to pre-Covid levels. This is now 900×700, the full size original: Nevertheless, what’s striking to me is how much they’ve risen in general – especially during the […]

BoJ is only central bank still buying

boj balance sheet items
  • This blog post needs some bullets
  • Otherwise it won’t display correctly
  • This should do the trick nicely, even if the last bullet is a little long
  • Real yields decoupling

    growth equities vs real yields
  • Real yields and growth equities used to move together
  • But now that relationship has broken down
  • The reason has to do with money flows
  • Capital flight from China

    china balance of payments
  • Capital is leaving China at a record rate
  • This is the second item on my list
  • If this works it will look cool
  • BoJ is only central bank still buying

    boj balance sheet items
  • This blog post needs some bullets
  • Otherwise it won’t display correctly
  • This should do the trick nicely, even if the last bullet is a little long
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