Vulnerabilities of the Reflation Consensus

Published on
January 7th, 2021
34 minutes

Chaos Rules in D.C.: Lyn Alden on the Fourth Turning and Her Latest Trades

Vulnerabilities of the Reflation Consensus

Daily Briefing ·
Featuring Haley Draznin, Ed Harrison, and Roger Hirst

Published on: January 7th, 2021 • Duration: 34 minutes

Real Vision managing editors Ed Harrison and Roger Hirst examine the consensus around reflation which has gripped financial markets – a narrative that Roger views as the most unanimous one he’s seen in his entire career. Ed and Roger first define reflation as a pick-up in growth alongside inflation and explore why so many market participants believe it to be a foregone conclusion. They then discuss the rush into small-caps, high yield, and low-quality stocks that has occurred as the confidence in reflation has strengthened. Ed and Roger consider everything from the yield curve to job losses to speculative positioning in copper and cattle, and they look forward to what is on the horizon for markets and the economy. In the intro, Real Vision’s Haley Draznin examines why the political unrest in Washington didn’t dent cryptocurrency or the stock market’s ongoing rally Thursday, and she looks ahead at what to expect from the job market in 2021.



  • JV
    Jan V.
    8 January 2021 @ 15:21
    To me gold and bitcoin are not a reflation trade. They do well in both inflation and deflation. It's a hedge against currency devaluation which seems likely in both the reflation or double dip recession scenario.
    • VA
      Victor A.
      13 January 2021 @ 05:48
      Was thinking the same thing... we just saw the selloff if anything I see these as inversely affected by the reflationary trade and higher yields..
  • SB
    Shaan B.
    12 January 2021 @ 12:51
    Interesting point on the "risk on mirage," reminds me of Greenspan's false perception that higher liquidity brings with it safety back in the LTCM days
  • PJ
    Peter J.
    11 January 2021 @ 14:27
    Great to see Roger, clear, concise and on the money with no translation or Finance dictionaries needed
  • PR
    Prashanth R.
    11 January 2021 @ 02:25
    It would be great to have an inflation vs deflation round table on RV and more importantly to have the discussion around time horizon.
  • KZ
    Konrad Z.
    10 January 2021 @ 19:52
    Inflation is never a given, because apart from money creation, its velocity needs to rise as well. And we can never be sure about that. What we can be sure about are tax increases by a Democratic President, Congress, and Senate. This is negative for the stock market and potentionaly bullish for USD and treasuries. The exact opposite of what the consensus expects.
  • JC
    JAMES C.
    10 January 2021 @ 15:20
    I suspect the demand that does return will largely be a rush to replace dwindling inventories at all levels of most surviving supply chains contesting for resources arising from fiscal support (good word),,,,, wondering how backlogs of raw and produced materials are accumulating and forecast for coming year or two?
  • MS
    Mark S.
    9 January 2021 @ 22:44
    This was an excellent assessment by Roger. Thank youj
  • AB
    Alastair B.
    8 January 2021 @ 17:43
    Haley’s voice is really improving. Keep it up :)
    • JL
      Jason L.
      9 January 2021 @ 01:49
      Agree but why does this continue to be commented on? I focus on the content and think it is excellent.
    • DS
      David S.
      9 January 2021 @ 03:29
      Agreed Jason. Leave the fawning alone....they're talking heads.
  • DA
    David A.
    8 January 2021 @ 00:07
    Congratulations, Roger, on your move to Woodbridge - a wonderful little town. And thank you for providing your much needed perspective on the three Rs (re-opening, rotation, reflation). But also I feel I must comment on something Ed said at the end (I paraphrase): "I've spoken to Tyler Neville and he has some similar comments to Roger, so maybe we should get Roger and Tyler on together to see their symbiosis". No!!!!! That is exactly the sort of echo chamber of agreement that we don't need. Making the right decision on whether the rotation is real or not is the single most important question for me as an investor for the next year. We need to hear the conflicting arguments being scrutinised and challenged. There is little to be learnt by listening to two people who agree.
    • EH
      Edward H. | Real Vision
      8 January 2021 @ 00:56
      I hear you David but I think their thinking is different enough that it would be interesting. I don't expect an echo chamber with those two. Cheers.
    • JF
      Jack F. | Real Vision
      8 January 2021 @ 03:18
      I agree with you Ed. I think a Neville and Hirst dialogue would be very interesting. Tyler is a credit and equity bull who is most likely sympathetic to the reflation thesis. Roger, as we’ve seen, is highly skeptical of the reflation thesis. So it would not at all be an echo chamber
    • DA
      David A.
      8 January 2021 @ 08:01
      Thank you Ed and Jack. I appreciate your reassurance.
    • RA
      Robert A.
      9 January 2021 @ 00:57
      I agree that Roger and Neville would be good, but only if each were assigned the task of proving each other wrong. I agree with Ed that they ARE similar, but at the “what if” margins they might be able to tear each other’s thesis apart. They are going to have to really work at it though for us to benefit. Neither are shrinking violets so I say throw the gauntlet down and try to tear each other’s position apart (in doing one or both might find the weakness or vulnerable lynchpin in their Own thesis).
  • DB
    Donna B.
    8 January 2021 @ 20:33
    Thank you for not talking about politics, for not calling the fiscal package stimulus and defining reinflation, which is often misused. Great discussion.
  • PP
    Patrick P.
    8 January 2021 @ 02:50
    Commodity prices are reacting to the falling dollar.... why is the dollar falling ? How about the twin deficits growing like crazy and the rest of the world (like China) not to buying our debt,,,The only buyer of the massive debt is the Fed....Have you seen the Fed's balance sheet lately? Also the world has decided to trade more and more in their own currencies and so the demand for offshore dollars has fallen. I can see the DXY at 75-80 ...
    • RH
      Roger H. | Real Vision
      8 January 2021 @ 06:30
      Hi Patrick P – “Have you seen the Fed’s balance sheet lately” – I have. I also look at the ECB’s balance sheet (and others). Since May of last year, the ECB’s balance sheet has expanded at a faster rate than the Fed’s balance sheet (the Fed started hard and fast but the ECB caught up). During this time the euro has gone up from 1.09 to 1.22 (the DXY is 57% euro). On the China front, there have been many periods where China and Japan (large US bond holders) have been liquidating US bonds with minimal impact on the USD (and even US yields). There are many compelling reasons to be short the USD today and this is reflected in the overwhelming consensus for the reflation trade. But things rarely move in a straight line for a long time and therefore time horizon and risk limits are likely to be tested.
    • PP
      Patrick P.
      8 January 2021 @ 13:27
      Roger ... you bring up the world's other shit shows as somehow making it all normal ..but they are following the lead of the world's reserve currency.... Our standard of living depends on retaining that statis and these morons are flushing us down the toilet. Instead of sending out $2000. checks let us really make everyone better off .. Why not $200,000. ?
  • DS
    David S.
    8 January 2021 @ 13:12
    Thank you Mr. Hirst and Mr. Harrison for responding to pertinent comments. It is a great help. DLS
  • MB
    Mark B.
    8 January 2021 @ 12:28
    Roger & Ed.... I have listened to this twice and found even more value and insightful commentary the second time.... I have missed Roger's insightful contributions and must request that at a minimum he resume weekly appearances... Thank you to all. Oh and out of bias my market positioning absolutely concurs with everything you both think and said... Thanks again, Mark.
  • GB
    Gordon B.
    8 January 2021 @ 12:25
    Interesting side note related to monetary data. The Federal Reserve announced on December 17, 2020 that it is redefining the M1 and M2 Money Supply Measures (H.6 Release) by shifting the savings deposits component into M1 from M2.
  • MJ
    Marc J.
    8 January 2021 @ 04:31
    Ahhh, now I understand QE. Thank you Roger.
    • GB
      Gordon B.
      8 January 2021 @ 12:11
      Seeking a source to track 401K flows. Ideas? THX
  • AW
    Agus W.
    8 January 2021 @ 11:00
    Hi Roger, Is it accurate to say the mkt run by passive dominance seems to care YoY change fundamental numbers from quarter to quarter more than levels of economic numbers hence the lack of change in earnings levels past 5 years but obviously the stock indices just keeps going up? Ie debate is rate of change vs levels.
  • MH
    Michael H.
    8 January 2021 @ 06:28
    Forest from the trees? Liquidity trumps all.
  • PP
    Patrick P.
    8 January 2021 @ 03:01
    Everyone keeps saying this feels like 1999.... so here is what 1999 looked like DXY 101.... CD Rates 5.2% .... 30 year fixed rate mortgage 6.92% .... National debt 58.9% of GDP So... NO..... this doesn't feel like 1999!! Not even close.
    • MH
      Michael H.
      8 January 2021 @ 03:11
      very true... even in 2008 my money market savings account was paying nearly 4% if i remember correctly...
    • RH
      Roger H. | Real Vision
      8 January 2021 @ 06:18
      Hi Patrick P – I think the key difference here is between “what 1999 looked like” and “what 1999 felt like”. What it felt like is clearly subjective to every individual. The experiences that Ed and I had during 1999 and 2000 are different from your own but I’m having some very similar conversations with investors and traders today that I had back then. I also looked very different in 1999.
  • MO
    Master O.
    8 January 2021 @ 05:16
    Two points on why Ed and Roger are wrong: 1. " Earnings don't move the overall market; it's the Federal Reserve. Whatever I do, focus on the central banks and focus on the movement of liquidity, that most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets." - Sanely Druckenmiller 2. You can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble." Ray Dalio. Real vision has been crying wolf about the stock market since April and every time they have been proven wrong. Stock markets don't need to be tethered to economic reality. Just look at Zimbabwe's and Venezuela's stock markets.
    • RH
      Roger H. | Real Vision
      8 January 2021 @ 06:05
      Hi Master O On point 1 - this is the framework I have been outlining for some time and I again referenced a comment that I made in March or April last year about the S&P at 4000 during a deep recession. I did not make this as a prediction, but to highlight that asset markets are being driven by liquidity rather than by fundamentals. On point 2 – the consensus narrative I refer to is the ‘active manager’ narrative that has appeared since the vaccine headlines in November (and to a lesser extent the US election result): short USD, short bonds, long commodities, long EM over US, long value over growth, long HY over IG i.e. reflate and rotate. It was not a reference to the direction of US equities. The consensus for 2020 was to be long US growth (tech) and that remains the silent consensus today because passive funds don’t rotate. My comment on the consensus is that it follows a reflation narrative that has been driven by dollar weakness rather than synchronized global growth and therefore maybe subject to the natural gyrations of currencies which rarely move in a straight line.
    • PB
      PHILLIP B.
      8 January 2021 @ 06:11
      Go grab a Scotch and chill out.
  • MJ
    Marc J.
    8 January 2021 @ 04:45
    Jesus Roger, were you drunk? Seriously, that was the best RVDB I've ever watched.
  • MV
    Marc-Olivier V.
    8 January 2021 @ 04:33
    Great chat with Roger. It does feel like a DXY driven trade right now. But if the FED doesn't change their purchase program, how does the narrative gets disrupted? Rates would have to go quite high for them to start talking about yield curve control. I can see disruption once the FED start to taper, but it is unlikely to happen until Q4 2021 or Q1 2022 as they will wait for unemployment to catch up, which is link to the health crisis and the vaccine.
  • IN
    I N.
    8 January 2021 @ 02:51
    Professor, we love Roger! I would love to see Roger's analysis tame Tyler Neville's bullish enthusiasm.
  • AL
    Andrew L.
    8 January 2021 @ 02:43
    Superb - Roger covers the key issues. Please give Roger a weekly slot.
  • JL
    Jason L.
    8 January 2021 @ 02:28
    Great job Haley! Such interesting times with everything going on and Bitcoin hitting $40k.
  • EH
    Eric H.
    8 January 2021 @ 02:10
    Roger - after the initial covid crash I remember you saying you weren’t going to enter the market until we were back at all time highs. Now we are here and you’re still in cash waiting for a second dip. Is there a point to the upside where you’d enter without another crash or could you be locked out for now? Possible to DCA?
  • NL
    Nikola L.
    8 January 2021 @ 01:50
    can we have Roger once per week as fixed feature? please..
  • DS
    David S.
    8 January 2021 @ 01:26
    Well done. Thanks for not talking about the Capitol so far. From the small sample of passive investors I know, they assume the market will always go up. In may go down for a while, but you get more for your money on a dip. It will recover and you will be fine. It is a variant of the dollar average buying. The key is to outlive the dip. With so many passive investors, it may turn out to be correct. It is never the same. DLS
  • CF
    Christopher F.
    8 January 2021 @ 01:23
    And the M2 is likely that n the pockets of people with a lower marginal propensity to consume.
  • FL
    Francis L.
    8 January 2021 @ 01:17
    Glad to have Roger back
  • SS
    Scott S.
    8 January 2021 @ 00:41
    I really appreciated this analysis. Thanks for this. I'm so tired of political analysis so this was great.
  • JH
    Jacqueline H.
    8 January 2021 @ 00:35
    Terrific analysis and perspective. Thank you both!!!
  • MD
    Matt D.
    8 January 2021 @ 00:23
    Great interview Ed and Roger. A really insightful comment - the narrative is coming from the active investors. ! !