Pro Macro: In Focus – The 2022 Rollercoaster

Published on: January 14th, 2022

The Fed has retired transitory, employment is booming, wages are rising, supply chains remain disrupted. The inventory cycle is young and Omicron outcomes are better than feared. Is 2022 the year of normalisation? Be careful what you wish for (financially speaking). Normalisation will end the abnormal return trajectories of CV-19 and QE affected assets. Let the rollercoaster ride begin.

Comments

  • JG
    Johan G.
    16 January 2022 @ 20:19
    Thanks Julian, agree entirely! Some ideas: Inflation cancels the Fed put; that probably means we enter a new economic paradigm which is likely to surprise a wrong footed market. Volatility indeed going forward. If there is a labor shortage and inflation, then a real cooling down of the economy is warranted and necessary; might feel like a recession to the financial markets but not so much to a labor force in demand? Stop-go policy with big swings and each top and bottom of inflation and interest rates higher over the next few years would be a 'replay' of late 60 and 70'ies? The big driver then was higher energy prices, and with the renewable energy drive ahead of us, I suspect the initial impact will be higher energy cost for all of us over the next decade. Any softening in the economy would open up for Biden's infrastructure plan, kickstarting the economy, investment spending, inflation and labor shortage. Rebuilding the global energy infrastructure is a massive undertaking. Weaker markets will encourage boomers to not retire and stay in the labor force which is ok with the Fed? (maybe not so ok for the boomers....) Higher nominal growth rates with a higher inflation reduces the Fed balance sheet over time compared to the GDP, which is what matters. They tighten by just maintaining the balance sheet at todays nominal level. Interesting times.
    • HM
      Harry M. | Real Vision
      19 January 2022 @ 11:52
      Yup! My suspicion is that we will see much larger market swings reflecting the increasing risks. Just wait till the FX market gets the memo!
  • OD
    Oliver D.
    14 January 2022 @ 18:57
    Regarding HYG: Please describe low strike. 75? Thanks!
    • JL
      J L.
      14 January 2022 @ 19:08
      i assume he is referring to the 80 strike, meaning stay short the march 80s and buy some june 80s, or even close the march and add some june, I'm also looking forward to clarification from the team
    • SB
      Stephen B.
      14 January 2022 @ 22:49
      pretty sure he's saying buy back the shorts and instead of having a put spread its just long puts
    • LM
      Lawrence M.
      15 January 2022 @ 01:01
      I agree with Stephen. I take this as Julian saying to open up the downside.
    • HM
      Harry M. | Real Vision
      19 January 2022 @ 11:50
      Exactly. Buy back the short put and keep the long.
  • HL
    Harold L.
    15 January 2022 @ 02:47
    Thanks so much for your insights, Julian. So much has changed since November! You’re so right that the Fed has been extremely unresponsive to inflation especially given the evidence that they have pretty much achieved their mandate for full employment. You are convincing me of a greater probability that momentum will take us to an overheated economy. If that’s true and the Fed telegraphs an even more aggressive tightening than what futures markets are implying, then this market will be destroyed rather than a softer landing where we only get scratched up. Risk/reward for equity and spreads seems to be on the downside. For what it’s worth, your views have me switched from greed to fear for 2022 outlook at this point and I’m peeling off risk. And with many market participants in denial, I think it's just the beginning. With the normalization ahead of us, we’ll be in for a roller coaster indeed.
  • GC
    Gabriel C.
    14 January 2022 @ 19:27
    What would be an alternative to futures market for this trade? I dont trade futures but stll interested on an ETF, Im thinking about buying UUP PUTS, but not sure whether would work kind of similar.
    • NP
      Nick P.
      14 January 2022 @ 22:08
      from my experience, they are not the best, but could work. liquidity can be an issue, so keep that in mind
    • LM
      Lawrence M.
      15 January 2022 @ 00:59
      I would use the FXE (Invesco CurrencyShares Euro). It has a solid option chain.