An $8 Trillion Cliff

For now, the market is “cool with” policymakers being behind the curve on inflation.

That assessment comes from BofA’s Michael Hartnett who, in the latest installment of the bank’s popular weekly “Flow Show” series, listed several catalysts that might prompt investors to lose their “cool.”

At some point, Hartnett suggested, central banks will be compelled to catch up to the reality of persistent price pressures. That process (of getting back out in front of inflation) could entail “aggressive” and/or “painful” tightening.

Catalysts which may prompt traders to price such an outcome into risk assets include confirmation of Jerome Powell’s renomination, a recovery in nonfarm payrolls after two consecutive large misses, persistently elevated wages and rents or some combination of those developments.

Admittedly, this discussion feels a bit tired by now. There are only so many ways to say the same thing, and we’ve nearly exhausted them when it comes to warnings about central banks underestimating the potential for inflation to prove semi-permanent, in turn raising the odds that policy will be forced to “overcorrect,” triggering a recession.

And that’s basically the whole argument, is it not? Each and every week, analysts, economists and journalists find new ways to tell the same scary story, when it can be summarized in just one sentence: If inflation doesn’t abate, central banks may be forced to rapidly tighten policy, chancing an overshoot in the “other” direction that chokes off growth, leaving consumers to cope with the decidedly unfavorable combination of lingering inflation and restrictive monetary policy.

Thank god for Evergrande and the energy crisis, otherwise every other story would be just another iteration of that ad nauseam narrative.

I often wonder how recording artists can stand performing the same two-dozen songs every, single night in different cities while on tour. I’m sure the money helps, but you have to think it gets old after a couple of stops.

In any case, the scenario described above does seem to be getting more likely. The charts (below, from BofA) are self-explanatory. “Global CPI consensus forecasts continue to rise [while] global EPS forecasts for 2022 [are] in a downward revision trend,” Hartnett wrote.

Global growth upgrades appear to have peaked too. The IMF this week offered modest downside revisions to the Fund’s overall outlook, which Gita Gopinath was careful to emphasize masked “a dangerous divergence in economic prospects across countries.”

Hartnett delivered a familiar set of sorta-predictions in his latest — I say “sorta” because they’re not really “forecasts,” per se, more like musings informed (sometimes only loosely) by the bank’s official calls. That’s not criticism (at all), it’s just to say that Hartnett’s are big-picture takes, seemingly designed to be engaging, versus the kind of dry, colorless “color” you might get from an “official” upgrade, downgrade or projection.

2022 will be the year of the “rates shock,” Hartnett said, as “monetary policy tightening spreads from EM to DM.” The likely winner: Volatility and, in Q1, the dollar. When volatility and the dollar are the winners, everything else is a loser, almost by definition. Hartnett mentioned credit, stocks, tech and “Wall Street” among candidates for suffering.

He also suggested the political calculus may have changed. “Policymakers and politicians are now worried inflation will damage growth and approval ratings,” he wrote. That means policy will “pivot from pro-growth to anti-inflation,” as evidenced by the Fed’s intention to taper despite two months of weak jobs growth, ongoing efforts to trim Joe Biden’s $3.5 trillion social spending plan and global tapering.

The figure (above) speaks for itself, but note the chart header. The world’s largest economy is moving ever closer to a very steep cliff.

On Friday, the preliminary read on University of Michigan sentiment showed consumers have adopted a pessimistic assessment of current economic policies, in part because Americans apparently believe the White House’s fiscal plans are “too risky,” to quote survey Chief Economist Richard Curtin.

“US monetary and fiscal cliffs ahead as $8.4 trillion in emergency stimulus ends,” BofA’s Hartnett went on to say.

As for any year-end rally, Hartnett’s message was simple: “We say ‘sell it.'”


 

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2 thoughts on “An $8 Trillion Cliff

  1. H-Man, I think Hartnett is spot on and your right, the broken record keeps playing the same song — inflation is out of control and the only medicine in the cabinet is to jack the rates. I would not be surprised see the Fed meeting in November accelerate tapering. Instead of removing $15B a month, it could be $20B or more to clear the decks to raise the rates.

  2. Your comment about touring rock stars was interesting. My daughter and son-in-law were devoted to Tom Petty. Their wedding present to each other was a set of tickets to six concerts in the heart of a Petty tour in 2008. The interesting thing about that tour was that each of the six concerts they saw had a different play list over the 12 day span. Apparently the band couldn’t bear to do the same stuff every nite.

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