Macro Digest: Powell just started the next bull run in commodities

Here is my overall 2023 take based on recent monetary and economic data: The Post Powell speech (and backdown) analysis:

I think the US economy is going to run hot in Q1 2023 and not “cold” i.e.. recession. All data points show resilience in consumer spending and accelerating high frequency data on inflation and demand. This was never ever going to be a classic recession (full employment and inflation the why – and technically because in nominal terms you can’t have “recession” when top line grows with inflation 8-10%).

Two mistakes were made (at least). The economic ‘slow down’ merely reduced excess demand which to this day remains above and in excess of supply. Energy - The concept that energy finds a solution driven by mean-reversion and self-correction is wrong from engineering point of view, due to lack of investment and not least constraints in both grid networks and capacity

Hence the trade in 2023 and this only big trade is long energy and commodities...

Fed will most likely be forced into not cutting rates in H1-2023,which market hope for, or in 2023 at all. Not because they don't want to but because the by them accepted easing in Financial Conditions will show up aggressively in data, as we pass into 2023. The market has never been more wrong than on a recession call or on long term inflation 'magically ending' at 235 bps.

We are as a model short investment, productivity and infrastructure into world of excess demand on energy and logistics.

The one light at the end of the tunnel being that average-cost-capital sits at 800 bps forcing full stop to no good new platforms and idiots with 'eyeball driven' concepts.. the barrier for investment (and return) has moved up into a model where capital right is and need to be distributed by “marginal cost of capital” vs. Marginal return. 

Whether it's enough to also move capital from being restrictive to incentive is up in the air post yesterday …due no commitment on doing the “right job” on medium and long-term inflation.

Chair Powell will go down in history as Arthur Burn II - which of course is irrelevant. What's not irrelevant is that Fed bet all on red yesterday similar to when they post pandemic talked on insisted on “transitory”… This new version is… It is transitory: Just look at forward expectations (Which for the record have close to zero predictability on REAL inflation when not in deflation).

This will be volatile period and it will see hard assets prevail (from food, logistics to commodities at large) as an expanding world and a China forcing themselves out for zero covid tolerance meets easiest financial conditions relative to underlying fundamental facts (full employment / fc) ever!

Good luck betting on easy ride from here and listening and believing in power of Fed or worse markets ability to makes forward prices... World is now 99 pc driven by hope often lapsing into outright dreams.

My conclusion:

• US economy will be running hot by end of Q1
• Inflation will take out recent highs by end of Q2-2023...
• 10 Yr. US will top at minimum 550 bps

I am fully prepared to accept “further upside/XMAS rally” – my macro calls are always minimum three month out if not six months but playing here is like playing on Reddit Crowd during Pandemic – they will and can remain around as long as pre-conditioned terms are good. This time around it’s the use of one-day options which dictates those massive Sigma events on “event risk days” not a continues repricing of that and odds setting.

Like I would never bet on Denmark winning anything in football, I would never side with directions driven by hope, which still and always belongs in church.

My 'friend' Sherlock said it eloquently: