Reflation Is Dead, Long Live Reflation

Well, former FX trader Mark Cudmore is back at the desk on Monday, and true to form, he’s got a bullish missive disguised as a bearish column for us.

Ostensibly, what you’ll read below is a cautionary tale for portfolio managers, but really, it’s fodder for the retail crowd in terms of giving them a reason to keep buying. Indeed, there’s even a reference to Investopedia, the most retail of all retail sites.

Still, there are some good points we suppose and although we don’t generally agree with how he gets there, we’d still agree with the conclusion: the reflation meme is played out and mostly because the narrative behind it doesn’t make much sense.

Via Bloomberg

It’s time to drop “reflation” from the asset-allocation lexicon and instead focus on what’s really happening with inflation. There may be a long-term structural tailwind for equities.

  • The “R” word has been bandied about a lot during the last six months. According to Investopedia, the term describes “the first phase of economic recovery after a period of contraction.” So it’s not relevant now
  • As for reflation policies – “designed to expand a country’s output and curb the effects of deflation” – they are ubiquitous and will remain so for a long time to come
  • The focus on the “global reflation trade” is distracting investors from what’s really happening. It’s about time we finally moved on
  • Global growth is picking up, slowly. As I’ve argued frequently in this column, there’s no runaway inflation and there’s not likely to be when machines are providing such a large disinflationary force on both wages and input prices. The data consistently confirm this
  • Central-bank balance sheets are humongous and still growing in aggregate. They’re unlikely to shrink in any meaningful way on any rapid timespan. Policy makers globally need to maintain negative real rates which means that, without sustained inflation, they can’t let yields rise too much
  • I get that it’s hard to be a structural bond bull any more. But that doesn’t suggest immediately becoming a structural bond bear. Instead, the era of tactical rates trading is well underway and that isn’t ending soon
  • This earnings season has been super strong. And no wonder, a pick-up in growth combined with contained inflation, cheaper commodities and abundant liquidity is the goldilocks scenario for stocks
  • Equities in many countries may be “expensive” based on historical comparisons. There are reasonable arguments that this premium is the new normal. Just don’t call it the reflation trade or your portfolio allocation may be misaligned to reality
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