Higher US Rates are a Good Thing

Today’s Musings are taken straight from this morning's BTV Surveillance show notes. 738 words, a 2.5 min read.

There has been a lot of press coverage/investor angst over the potential for rising inflation and interest rates. Understandably so given the Fed liquidity provisioning, the 2020 fiscal stimulus, vaccinations and the anticipated Biden Rescue Plan, not to mention the expected follow on Climate/Infrastructure plan.

In fact, it's almost a certainty that over the coming few months US inflation will rise to levels not seen in some time. Why? Because the Spring 2020 Covid inspired economic collapse led to negative inflation rates in March - May and as those #s drop out of the y/y calculations headline (not core or PCE) inflation will rise sharply, likely leading to higher interest rates as well.

I am here to tell you this is a good thing and infinitely more preferable than the opposite. First, this inflation spike will be transitory and will fade as we enter Fall. Second, rising inflation and rates are a good thing and suggest that vaccinations are working, the economy reopening, confidence returning and the cost of money rising.

Third, would one prefer that vaccinations fail, the economy remain in lockdown limbo, confidence remain weak, that we slip into deflation with negative UST rates? Of course not. We should be celebrating that the global mountain of negative yielding debt seems to have formed a nice double top and even 10 year JGBs have a positive yield.

Here is the recipe for investment success in the coming quarters: pay no attention to the inflation debate. Don't get spooked by 10 yr UST rates approaching 1.75-2.0% either, as long as it is in a gradual manner. The huge short position in the 10 yr UST futures supports exactly that. Look at gold - classic inflation hedge right? Well, it certainly isn't signalling inflation ahead. If the Fed can look through a transitory spike - and it will - then so can we.

Focus on the important things: global economic boom, Great Rotation/Golden Age for Asset Allocation, a US Govt that believes in its mission of helping people and better yet is capable of executing on that mission (How Democrats Learned to Seize the Day).

Activist Govts mean policy driven markets and thematic opportunity sets. Covid speed breaking out into climate, cyber, fintech/crypto, genomics etc is the place to focus one’s attention, not on inflation risk.

As our Global RIsk Nexus (GRN) reminds us, it all starts with health and here the news continues to improve. US cases are down over 50% from peak and vaccinations have ramped to 1.6M doses pd. UK cases are down over 70% from the peak just one month ago. The EU seems to be finally getting its vaccination process in order.

Watch cross asset volatility - stock vol (VIX) has remained elevated while bond vol (MOVE) has been quiescent - if stock vol comes down systematic, vol and risk -parity investors could come back into the market while JPM points out that the MMF mountain is much larger at this stage than in 2000 or 2009.

Climate and tech continue to drive Tri Polar World regional integration. China’s near dominance of the clean energy space, from minerals to materials and production capacity (65% market share of lithium batteries) has Europe seeking its own regional supply chain (RSC).

On the tech side, the semiconductor chip shortage takes Taiwan, home to 70% of production of those auto chips one reads about, off the geo political risk table & pushes US and EU to consider measures to ensure advanced chip making capacity in situ. China of course remains focused on tech self sufficiency.

Finally to Crypto - I have noted that institutional adoption would drive 2021 pricing and lo and behold last week, Blackrock, passive investing’s big dog, allowed its Global Allocation Fund to trade BTC futures and this week BNY- Mellon, one of the world's largest custodians, announced it will custody such - as they say at the Australian Open, game, set and match. It's not a question of if, but of how much to allocate. Reach out to discuss.

In global macro land time and mental bandwidth are precious commodities; focus on what's important and right now that means alpha generating thematics.

Want more? Enjoy this MacroHive podcast where I expand on much of the above.

TGIF!