Inflation still needs to be controlled

 

Inflation still needs to be controlled, with October CPI at 3.7% and CPI excluding food and energy rising to 2.6%. Energy prices have fallen since the beginning of the month, but the numbers still aren’t headed in the right direction. Still, this forces the Fed to act at its December meeting since the overall economy seems to be in good shape. The probability of a Fed hike has increased, and Fed Governor Waller now suggests a 50 bp increase may be necessary. 

While the numbers were below consensus, inflation still suggests Fed action is necessary. 

Another new term - "speedball" capitalism

 

The Economist coined the term speedball capitalism to describe the current state of global finance and markets. It combines massive AI capital expenditures tied to rapid hype and inflated equity valuations with the market depressants of high interest rates and geopolitical instability. On the one hand, you have euphoria from the AI explosion; on the other, a gloomy market backdrop of rising costs of capital.

This is the financial equivalent of the K-shaped recovery. Some are doing well, and others are not. The world looks very different for AI people than for those trying to manage higher rates. 

The news cycle seems compressed and quickly moves from strength to weakness. Investors just move from one idea to the next, pushing capital into the next new thing. The finance world is full of contradictions, again, between strength and weakness.  All this creates large capital flows that can change on a dime.  

This connects to Adam Tooze's phrase, the "profit dollar," which suggests the dollar is associated with equity flows rather than the usual bond-safety flows. 

New word in finance - FOGO

 

FOGO - it is not Fear of Getting Old, but 

FEAR OF GETTING OBLITERATED!

Forget about FOMO - fear of missing out. That was yesterday. Now, as Paul Singer and Elliot Investment Management highlighted in a recent investor letter, the real fear should be excessive speculation and high valuations. We have heard this before, and it may be early, but downside risk is high when valuations are high. 

The fear is a quick shift in valuation thinking, and it will be hard to exit positions when the market turns. 

The key issue is learning to be a resilient investor who can diversify and adjust allocations when expectations change sharply. Scenario analysis can help here. Consider upside and downside risk, and plan for the extremes.

Is the dollar always a safe haven? No

 

The dollar is not always the safe haven that investors would like. This should concern investors, especially since foreign capital flows are moving into equities. The safety issue of the dollar was well described by Andrew Hauser in "On the safe haven status of the US dollar".  Macro investors should focus not on the current dollar move but on what may happen in the next crisis, likely when equities turn down.