Marko Kolanovic Paints A Foreboding Picture
JPMorgan's Marko Kolanovic sees risks. Proliferating risks, not least of which is a rerun of America's last major bout with that most pernicious of all macro conjunctures.
In a rare note from his own desk, Kolanovic on Wednesday cautioned on the possibility that the zeitgeist could "turn back towards something like 1970s stagflation," a prospective development which would obviously have "significant implications for asset allocation."
If you ask Marko, it might've been premature for market par
He will be right, eventually.
What’s that old saying about being early?
Seems to me like he’s fighting the last war when generative AI is the real wild card in all of this. Maybe what Marko predicts will take effect prior to genAI going mainstream, but I’m keeping my focus on skynet.
The recent period is rhyming with the early- to mid-1960s. In 1960, there was a national recession. By mid-1961, the USA had:
* Year-over-Year CPI: under 0.75%
* Fed Funds Rate: under 1.75%
* 10-year UST: under 3.90%
By mid-1966, the USA had:
* Year-over-Year CPI: ~2.5%
* Fed Funds Rate: crossing over 5.0%
* 10-year UST: crossing over 5.0%
Thereafter for a while, these rates trended down (and there was no national recession) and then these rates started trending up again. Turns out mid-1966 was the first of four waves of inflation/interest rates with ever-increasing peak levels.
By the late 1960s (peak in 1969):
* Year-over-Year CPI: just over 6%
* Fed Funds Rate: ~9%
* 10-year UST: just under 8%
Thereafter for a while, these rates trended down (and there was a national recession) and then these rates trended up again until…
Next peak in mid-1974:
* Year-over-Year CPI: over 11%
* Fed Funds Rate: just under 13%
* 10-year UST: just under 8%
Thereafter for a while, these rates trended down (and there was a national recession) and then these rates trended up again…
Next double peak between mid-1980 and mid-1981:
* Year-over-Year CPI: over 14%
* Fed Funds Rate: just over 19%
* 10-year UST: just over 15%
And of course there was another recession (“double dip”), but it then took years of the federal funds rate being much higher than the Year-over-Year inflation rate to sustainably keep inflation down:
* Between 1981 and 1986 (6 years), the federal funds rate averaged 550+ bps MORE than the monthly YoY inflation rate
* Between 1981 and 1990 (10 years), the federal funds rate averaged 460+ bps MORE than the monthly YoY inflation rate
When you look at the published data, it is clear in the three earlier peaks (1966, 1969, 1974), the federal funds rates came down more quickly and with ever-shrinking margin over the corresponding Year-over-Year inflation rate:
* Between 1960 and 1969 (10 years), the federal funds rate averaged ~185 bps MORE than the monthly YoY inflation rate
* Between 1966 and 1975 (10 years), the federal funds rate averaged ~92 bps MORE than the monthly YoY inflation rate
* Between 1970 and 1979 (10 years), the federal funds rate averaged ~1.5 bps MORE than the monthly YoY inflation rate
Reasonable analysis and fair comparison to ’70s. But as H has pointed out, markets don’t care much about geopolitical risk–yet.
NVDA’s CEO seems to have a new buzzword to describe the AI rush every time he speaks publicly…And it is a “rush,” as in gold rush. Ever seen a data center? Or one under construction? Take a ride around I-64 in Northern VA (NOVA) and you’ll see a bunch. Enjoy the ride.
I have been in the stagflation camp for quite a while now. A small wrinkle- it’s the goldilocks economy for the top 20%, stagflation for the bottom 80%. Top 20 had an excellent covid and post covid. The rest of the population did not. 10% of the population owns 93% of the stock market…..We have several housing crises at once, and many other problems….