Dario Perkins
@darioperkins
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MD Global Macro @TS_Lombard , macro themes/research/risks, central-bank specialist, started career at HM Treasury in late 90s, ex ABN AMRO, AC Milan fan
London, England
Joined June 2009
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NEW BLOG: Are central banks geniuses for getting inflation back down, or did they get lucky? And is their luck about to run out...?
No paywall. Again please share because it helps me convince
@TS_Lombard
I should be putting this stuff out for free on here
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Economists have predicted 5 out of the last 153 recessions (IMF research)
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People hated this chart when I posted it 12 months ago. But I still kinda like it..
Based on history, either inflation had to come down ("transitory") or equity valuations were in trouble.
still a way to go...
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THE RECESSION THAT DIDNT HAPPEN (so far..). 🧵
Why was the consensus wrong?
1) People fooled by bullwhip in manufacturing (fake cycle)
2) The big squeeze on real incomes is fading
3) Fiscal overhang (excess savings, energy subsidies in EU)
4) Misled by Phillips curve (again!)
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The problem isn't that the UK budget was inflationary, its that it was moronic. And a small open economy that seems to be run by morons gets a wider risk premium on its assets - currency down, yields up
As enjoyable as it is to make fun of the UK, I'm not sure it's fair to characterize a tax package that mostly lowers rates for entities with low marginal propensities to consume as "inflationary"
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if you ask AI a question about macro, it sounds really smart but it is essentially talking bullshit and offers no real insight or understanding.
so yes, it can displace a lot of jobs in this industry 🤣
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NEW BLOG: Why the macro consensus has been getting everything wrong, and what comes next. Q&A guide to the weird business cycle that keeps fooling investors.
(no paywall. Please share)
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Fed policy path, as seen by the bond market
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So inflation, I'm on Team Transitory. BUT I always spend time thinking about where I could be wrong and this is the scenario that troubles me most. It is not about "fiscal dominance", or inflation expectations or any of that other guff. It is about persistent supply disruption.1/
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"Lehman moments" since Lehman:
Greece 2010
Italy 2011
Spain 2012
China 2014
Oil 2015
China 2016
Brexit 2017
Mallmageddon 2018
Repo 2019
COVID 2020
China 2021
Europe 2022
Did I miss any?
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2022 might be the year we discover the true state of the economy, after all the distortions of the last 2 years. This hasn't been a genuine business cycle, something that has thoroughly confused most investors. And many economists have been extrapolating mindlessly from noise..😉
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This is my favourite inflation tweet of all time. The four stages of the central-bank response
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We should have a race. The first central bank to crash their economy with rate hikes wins a prize...
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I will never forget a meeting I had with a US hedgefund manager in September 2008 who just kept repeating the phrase "We are so f***ing f***ed!".
Current status of the UK
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NEW BLOG: the nightmare scenario for central banks
(i.e why policymakers are losing their s***)
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Wow: The BoJ now owns 70 percent of all outstanding 5-year and more than 80 percent of outstanding 10-year Japanese government bonds
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Everyone is asking the same question: why is UK inflation on worse trend than other DMs? There are two parts (i) supply (inactivity, Brexit, broken NHS), (ii) a public that have had their real wages squeezed for a decade & wont tolerate it anymore. Succession of policy failures
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Not seen a single 2023 outlook, but given the lack of imagination in this industry I imagine they will all say: lower but sticky inflation, weak growth/mild recession (40% chance 😉) and central banks hiking a little further before pausing for most of the year
Saved you the time
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Came back from work early today and caught my wife with the heating on...
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NEW BLOG (again in Q&A format): TEN POPULAR QUESTIONS ON MONETARY POLICY, plus a bonus question on "fiscal dominance". No paywall. Please share it because it helps me convince
@TS_Lombard
I should be putting this stuff out for free on here 😉
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BoE options:
1) Say & do nothing - looks clueless/ asleep at the wheel
2) Say something but do nothing - looks toothless
3) Do something small (50bps) - mkt will push you to do more, perhaps quickly
4) Do something big - if this doesn't work, you are in a worse position than (1)
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OK I'm calling it - 40% chance of emergency Fed announcement over the weekend 😉
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The US labour market can stay "pre-recessionary" longer than bond bulls can stay solvent
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Only economists can spend 18 months talking about "inevitable recession" and then wonder why everyone is so gloomy 🤣
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People say my macro views are unclear on here (!), so here is a summary from a client presentation pack
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In your macro textbook, strong USD:
- cools US
- boosts RoW
- exports US inflation
IRL (where everyone borrows & invoices in USD), strong USD:
- reduces world trade
- squeezes cross-border lending
- damages RoW balance sheets
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The "A" shaped recovery. You're welcome
(Sorry about the handwriting..)
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Even if inflation settles down at 2%, the public are still gonna feel pissed off about the price gains of the last 3 years. And it doesn't matter if wages kept pace (which they didn't). I'm not sure why economists find this attitude so surprising (maybe they need to get out more)
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NEW BLOG (the moment you've waited a whole year for...): My hilarious consensus-busting guide to 2023. And something special this year - we reveal Jay Powell's secret
#fintwit
account:
Pls help me out & give it a RT!
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There was a paper by Bernanke (2000 ish) showing that every US recession in previous 30 years was preceded by two things: (i) tighter monetary policy and (ii) spike in oil prices. Add 2008 to that... and we are left with only the fake 2020 recession as the exception
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If the stock market "only ever goes up" and every dip is a "buying opportunity", why do we need market strategists? Asking for a friend..
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The BoE is just trying to secure the wheels onto the car a little better, so it can drive faster into that wall.
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Can I get odds on a 2022 deflation scare? China slump, supply chains overcompensate, premature policy tightening...
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Its not QE. Its just a short-term operation to address an immediate risk to UK financial stability. Reassured yet?
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We can debate whether the US boom is real, but in Europe we have the same inflation with no sign of the boom. Its just a massive squeeze on our real incomes.
Your demand boom, our problem
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NEW BLOG: Central banks have a dilemma. 2008 PTSD vs the ghosts of the 1970s
(and why financial risk is viral...)
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Over the next few years
- inflation will be at tolerable levels
- growth will be stronger
- productivity will improve
- inequality will come down
And we will look back at the disastrous policy mix of the 2010s and ask WTF were they thinking
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I dont think it's about politics, or fiscal policy, or any of the stuff dominating the Sunday press. Those were accelerants. Austerity - even if it were politicallly sustainable - won't fix this. It's about an economy leveraged on an idea - permazero interest rates - that is dead
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when people show charts of US yield inversions, they never seem to include the 1970s - perhaps because the data aren't easy to find. Here it is:
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I've spent most of this year arguing that a recession wasn't imminent for the US. Since the summer, most recessionistas have flipped, which is odd because recession risk seems HIGHER now than it was 10 mths ago. I guess there is only so long you can be wrong in this industry 😆
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Main takeaway - cuts postponed (no longer so confident its just a bump in inflation), but hurdle for hikes is really high. Fed doesn't want break this economy just because inflation is stuck at a higher level. Revealed preference 😉
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THINGS THAT WON'T HAPPEN IN 2024.
Some, er, "bold" consensus-busting predictions... 🧵
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🧵Several central banks, including the Fed and the BoE are forecasting rising unemployment in 2023/24. While only the Brits are using the "R" word, this is something that usually only happens during recessions. What should we make of these forecasts?
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Part of the confusion about recession rn is because the fake recession signals we had 12 mths - the bullwhip in global manufacturing & the big squeeze on real incomes - are starting to unwind while we are simultaneously getting genuine demand destruction from monetary policy
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Ok, one more time:
- 60/40 works if the bond-equity correlation is negative
- the B-E correlation is negative if inflation is pro-cyclical
- inflation is procyclical in a world where demand shocks dominate supply shocks
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The BIS has published a useful guide to popular measures of financial conditions
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NEW BLOG - Inflation was always the endgame
(and the beautiful irony of macroeconomic policy...)
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We've spent the last 12 mths arguing about whether US inflation reflects excess demand or supply issues. But in Europe there is no debate. All the inflation is an imported supply shock. There is no overheating. So the ECB faces a v different policy question to the Fed
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remember, Europe didn't have a (domestic) consumer goods boom, and there has been no "revenge" spending in services (just a mere recovery). Now the region's outsized exposure to global goods bullwhip is bleeding into services, which could trigger genuine recessionary dynamic...
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NEW BLOG: Do we need a recession to tame inflation?
(and what if - like in the 1970s - it doesn't actually help)
aka the ultimate irony of persistent inflation and transitory recessions
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Central banks are all gonna be hiking in 2022. Inflation will plunge for reasons that have nothing to do with that tightening and officials will once again take credit for protecting their "credibility". Nice work if you can get it 😀
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worldwide Google searches for "recession" have hit a record high.
seems fine...
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If the world ends, we will have spent the last year of our lives arguing about inflation...
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there are lots of things wrong with the supply side of the UK economy, but this one often gets overlooked
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I mean, you can see why people are pissed off. Worst squeeze since the start of the Industrial Revolution
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Last year, demand fell faster than supply - deflation scare. This summer, demand recovering faster than supply - inflation scare. Is it really more complicated than that?
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US inflation story: 1) base effects 2) one-off reopening price rises 3) global supply bottlenecks (remember when we talked about the "bullwhip effect"). All totally forecastable, mostly transitory, and nothing to do with das money supply
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People shouldn't be angry we did "too much" fiscal stimulus during the pandemic, they should be thinking wtf were we doing for that decade before it 😉
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spent the morning reading Fed transcripts. Ahead of every major recession since the late 1960s, the Fed forecast a soft or soft-ish landing. Good to know...
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Monetary Policy simulations from the OECD. When all countries raise interest rates simultaneously, the impact on GDP is LARGER but the impact on inflation is SMALLER (because the FX channel is muted)
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Have you ever wanted to be a sell-side economist? Here's 10 rules (tricks of the trade) you need to master (my latest blog - told you I was bored..)
@TimDuy
@albertedwards99
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Genuine question: is the equity market "fully pricing a soft landing", as is now the popular cliche, or is it pricing a scenario where the top 7 US stocks are basically immune to macro weakness & a souring credit cycle? Quite a difference no...?
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For the Fed, a pivot means slowing the pace of hikes and then holding policy as a "restrictive setting" for some time - while fully expecting the activity data to get worse. For bonds, and by extension equities, it means actually cutting rates. That's the disconnect
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Roses are red
violets are blue
inflation is transitory
but so are you 😉
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People dying of a deadly pandemic, hospitals overrun, everyone forced to stay home, unemployment at depression levels. That was all fine. But add 60bps on yields from 700-year lows and we're freaking out 🙂
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If I had to lean against the consensus soft landing (a view I held all year), it would be: economies now deteriorate faster than people expect in the next few months, central banks react strongly (inflation has given them that option now) and growth rebounds strongly. All in 2024
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I get why central banks want to sound hawkish. They believe their own hype about "credibility", "expectations" and all that other BS. They take credit for 30 years of lowflation. And they are trying to make a point. But who is this directed to? Regular people aren't watching...
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NEW BLOG: Monetary lags: "Shorter and less variable"
(i.e. why that global recession isn't inevitable after all)
Will add a reading list later - got a bunch of great links
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Three months ago, the debate with investors was whether there would be a recession. Now the debate is whether the recession - seen as inevitable- will include a financial crisis 🙄
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Read this years ago and it's a paragraph that stuck with me
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Those who say the BoE move signals a broad pivot in global monetary policy are gonna be rather disappointed when it does its next monster rate hike
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And here is a reason for Fed to pivot. Soft landing has come from destruction of vacancies rather than jobs. As in 40s & 60s, the starting point helped (large unrealized demand i.e staff shortages). But as excess vacancies disappear, you are more likely to see net job losses.
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Central banks stuck between the ghosts of the 1970s and their PTSD from 2008. I reckon PTSD wins out
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it still amuses me that 2% inflation targets are the result of some politician in New Zealand bull***ing his way through a TV interview
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Central banks are not hiking rapidly to force inflation down. They expect inflation to come down. They are hiking rapidly back to some sense of "neutral", so they are in a better position to deal with inflation if it doesn't come down. The first part is priced in IMO
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What if the 2020s are the inverse of the 2010s:
- tight DM monetary policy, loose fiscal
- high pressure labour markets
- China deflates while RoW reflates
- De-Japanization (even for Japan...)
- global productivity revival
- faster technological diffusion
Thoughts?
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I totally nailed it. The stock market has gone up literally every day since we made this podcast.
You're welcome
Your Sunday dose of The Macro Trading Floor is here!
This week we hosted TS Lombard’s Global Macro MD
@darioperkins
.
Go on your favorite podcast app to enjoy the macro thesis behind his trade idea & our discussion on whether we are in a long-term regime change
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Cold CPI means the economy is ALREADY in recession, hot CPI means the economy will SOON be in recession, and anything resembling Goldilocks means the data are fake.
Am I doing this right?
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BoE now forecasting a recession and 13% inflation. Lovely...
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It seems pretty clear at this point that the European central banks have already over-tightened. From here on, every month they spend in denial only compounds a series of the policy mistakes - and risks unnecessary collateral damage
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ChatGPT is scary not because the content is so good, but because it is amazing at bullshitting. That can't be good news for an industry where so many jobs are based on that very skill 😆
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Only the UK can combine Europe's energy crisis, US labour shortages and EM political chaos 😆
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Three things they told us couldn't happen:
-immaculate disinflation
- rapid China reopening
- Europe surviving the winter
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The most striking thing about the MMT manual? The tone - the complete lack of self-doubt. Despite decades of f***ing s*** up, there are still economists who think they have all the answers 😀
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The US has a labour shortage of 5m workers. One way to think about this is that it would take a huge decline in GDP to "rebalance" things. A better way is that companies aren't going to fire staff and inflation isnt going to settle at 2%
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