Macro Musings by Danny D joined me for a Substack live, and these are the 5 biggest takeaways from our conversation:
1. The low rate world was the anomaly, and it isn't coming back.
Danny explained why rates stayed so low for so long, and why those forces have flipped:
* Last cycle had baby boomers in their peak saving years and households repairing their balance sheets after 2008, and both pushed rates down.
* This cycle, household wealth is up nearly $70 trillion and the boomers are spending their retirement savings instead of adding to them.
* The savings rate sits at 3% versus 8% last cycle, even with rates far higher.
What to do: Stop waiting for 2021 to come back and start valuing stocks like capital costs something again.
2. The Fed just changed its rulebook, and we're back in June 1999.
Danny thinks last week's FOMC was a paradigm shift, and I agree:
* Warsh called the neutral rate an academic exercise and described the hike as removing accommodation, which means the Fed thinks policy is still loose.
* The Fed is now watching nominal GDP, which has gone from 5% to 6.6% as of Q2.
* There's no forward guidance anymore, so the market has no idea how far this goes.
Greenspan ran the same playbook in 1999, and stocks and bonds played ping-pong until the 10-year hit 6.75% and things broke in March 2000.
What to do: Get out of long duration, high multiple and consumer stocks before financial conditions finally tighten.
3. The inflation gauge Wall Street trusts is broken.
* Break-evens have sat at 2.5% the entire cycle, no matter what inflation prints.
* The Fed bought far more 10-year nominals than 10-year TIPS during QE, which mechanically squeezed break-evens tighter, and now it reads that same market as proof inflation expectations are anchored.
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