As I stare at this model, I can’t help but think of the last time we ignored what our models say (e.g. namely that big licks of monetary and fiscal policy (e.g. stimulus) to keep incomes whole (so consumption doesn’t collapse) at a time in which production is shut in (supply curve shifts left) would be inflationary, even if we haven’t seen such a phenomena in a long time), ultimately proved harmful.

The below is the term structure of interest rates (10s-2s, 10s-3m, and various versions that are spread adjusted).

Against this, we have risky assets once again up strongly in the past month. Now good things have happened. We had the CPI print that suggests we are (maybe!) returning to trend.

We had a benign start to European winters. We had China trying to stimulate property again. We had strong Ukrainian progress on the war front (perhaps brining it to an end?).

All great stuff. We bought some risk too, during the month on the back of this. But we also said we’d be inclined to fade the rally if it keeps going.

And that term spread model above has to matter.

There is a call to action but I will leave that one behind the paywall.

There’s also some nuance to those actions, based on the macro developments. For example, the China property market stimulus won’t work. It buys time, perhaps, but doesn’t alter the conclusion. Expectations for house prices have changed.

Those COVID case rates are also pretty alarming. Not locking down won’t work, because when people get sick enough, they do it anyway.

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