Macro thoughts

I am a little surprised that the market wants to run, given real rates and the Fed just around the corner.

Some very good news on the UKR-RUS front, perhaps, and some ongoing good news about declining freight rates…

but the good economic data just means a still hawkish CB disposition. Real rates (TIPS) are at their post-pandemic highs…

In general, we’ve got the Fed tightening into a deeply inverted yield curve. We’ve got high oil prices (putting it mildly, an energy crisis for everyone else) and a housing market that is rolling over.

Those are some solid recession red flags, historically.

And for those point out the oil price isn’t “that high” in real terms. Sure, sure. The point is just putting them together; there’s only so many recessions, in 50 years, and only so many indicators that seem to causally match up to them. Housing, energy, rates are the biggies.

We ourselves have argued in favour of team transitory. We argued it for so long that eventually it felt a little silly, because everything is transitory if you wait long enough. But the point is, clearly, some supply side pressures are abating.

And the market “feels” like it wants to run. Ex ante returns are pretty good, particularly ex US. So, there’s definitely good reasons to be bullish, and good reasons to have a healthy lick of risky assets in one’s portfolio.

We often frame those points up to clients, in context of their SAA, as in “good reasons to allocate inline with one’s strategic objectives”.

And, on the DAA front, which defines our tilts at the margin, it is impossible to ignore the Big 3 (rates, housing, oil), which should absolutely be restraining an over-enthusiastic allocation to risk.

What else is there to be done? There is a risk that Putin goes nuclear. There is a risk that the EU gas shock spills over into weaker global demand, at the time that China buckles under property related stress.

It is rare that there’s so much going on, in the macro backdrop, but that’s the world we find ourselves in.

Having a portfolio that does its best to try and reflect those risks, in its various asset and sub-asset class allocations, strikes us as the right approach.

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