Global macro decision choices - A binary world?

 

Without oversimplification, the current global macro world can be viewed as a set of binary choices. Your trades will be determined by where you stand relative to these binary choices. Of course, the world is not binary, but this is a good way to first think about the world.

• Inflation - Persistence versus transitory. The transitory inflation crowd was absolutely destroyed in the first half of the year, but the choice is still present. Commodity prices have declined from extremes in the spring and goods congestion has fallen. The goods market inflation is likely to fall, and it is now a question of service inflation. 
• Inflation - Anchored or unanchored. Inflation expectations as measured by breakevens have fallen from highs in the spring. The question is whether markets believe the Fed can raise rates and show resolve at getting ahead of current inflation.
• Recession likelihood - Hard or soft-landing. We are now seeing a soft landing recession with GDP likely to show another quarter of negative growth. Labor markets are still strong, so the impact may be mild. A harder landing is being priced in 2023 given the strong Fed rate increases.
• Recession length - Short or long. The soft crowd believes that any recession will be short and not last more than 6-9 months. The other extreme is that we will be in a long recession with a slow recovery that will last for well over a year.
• Monetary policy - Resolve versus cave. The choice is between an unconditional resolve to beat inflation versus the Fed caving some time at the end of the year or first half of 2023.
• Policy shocks - There has been little change in fiscal policy nor has there been any discussion of alternative monetary policy. QT has begun, but it has not received much attention.
• Geopolitical risk - War or peace. The Ukraine-Russia War is not going away and if it continues into winter, the global economic cost will be significant. Of course, a quick resolution may not result in oil flows moving back to 2021 levels.
• COVID - The never-ending pandemic - There is talk of further lockdowns in China, and a new variant, BA.5, is now taking hold. The question of whether we will be in another lockdown this winter is real.
• Equity bear market - The choice is more a matter of degree. If earnings are adjusted downward, the bear market will continue. A controlled slowdown with inflation falling will allow for market stabilization.
• Bond bear market - The bond market performance for the last six months is still one of the worst recorded. Further contraction is function of inflation persistence. A bond rally may be related to a recession. 

Each of these binary choices are not mutually exclusive especially when we discuss the equity and bond bear market. There is some consistency with the choices made.  Answer these binary choices is a good first step for managing any global macro view.