Daily Brief – Positioning for Juxtaposition

Positioning for Juxtaposition

If these economic times feel unusual to you, it’s probably because they are. Two of the defining characteristics of the market at the moment are rock-bottom confidence in the real economy and sky-high costs of borrowing. This is perhaps best exemplified in the United States. Borrowing costs and confidence levels aren’t necessarily independent of one and other. High borrowing costs can of course deteriorate confidence because, as the risk-free rate of return rises, ordinary low-risk low-reward investment options become unattractive to investors. This demands exploration into higher risk, higher reward options that can erode the confidence of consumers and manufacturers alike by increasing underlying volatility and risk.

To find a spread between confidence and debt costs as wide as the present day in the United States you’d have to drag your charts all the way back to the early 1980s. If lessons are to be found from history, that chasm between confidence and debt costs preceded a double-dip recession in the US. The UK also experienced a severe economic downturn in the early 1980s and although related shared distinct regional catalysts. The equity bulls will be making the case today that this time is different and that the AI-boom driving debt costs higher and producer confidence lower is what makes this time different and sustainable.

High inflation was certainly a factor in 1980s America. However, with today’s Fed it would be unthinkable that the 1980s Volker shock, which saw US rates climb to highs in excess of 20%, could be repeated. We certainly shouldn’t be reading any conclusions about the value of the Pound which, last time around, lost some 40% versus the US Dollar in under three years. Despite yields being on the rise, near-term rate expectations from the Federal Reserve have declined for the October and December meetings. This week’s CPI, PPI and Retail Sales data will therefore represent material risks to the Dollar. There is obviously room for expectations to be priced back in and, should the data land in a way that is supportive of inflation expectations, the Dollar’s current rally could be extended further.

Discussion and Analysis by Charles Porter

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