Rudi’s View: Hope Beyond The Macro-Burden

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Oct 06 2022

In this week's Weekly Insights:

-Hope Beyond The Macro-Burden
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor

Hope Beyond The Macro-Burden

The fortunes of bonds and equities remain closely intertwined as inflation remains higher-for-longer while central banks continue tightening.

Year-to-date the S&P500 is down close to -25% but what is rather unusual is the Bloomberg Global Bond Aggregate Index is showing a near-identical -21%.

Embedded investing wisdom is bonds and equities are each other's polar opposites; they're supposed to compensate for the opposite side's losses, but not so in 2022.

The hope is continued central bank tightening will eventually break the uptrend for price inflation, avoiding a repeat of the 1970s, though it may also break the economy and/or the financial system.

Flash backs of 2007-08 are returning to the global investment community as the Bank of England has come to the aid of suffering UK pension funds. On Friday one ABC journalist tweeted a rumour an unnamed international investment bank might be in trouble and the news spread like a wildfire around the world.

Most speculation is pointing at Credit Suisse, or Deutsche Bank. [It was Credit Suisse.]


Investors have been reminded that whenever global GDP decelerates below 3%, bad things tend to happen. (It's forecast to happen next year).

Historically, a too-strong US dollar triggers the same negative impact.

Irrespectively, and contrary to central bankers' apparent confidence, investors didn't really think that winding back all of that extraordinary liquidity stimulus would be a smooth process without any hiccups.

The real issue, and one that is without any doubt on every central bankers' radar, is the shrinking availability of US dollars inside the global financial system.

The world's reserve currency is still the oil that makes the machine run smoothly. Not enough dollars means liquidity dries up and corners of the financial sector start making loud shrieking noises.

Like what just happened in the UK bond market.

The shrinking volume of US dollars (and of USD collateral) is not solely related to Federal Reserve tightening, though hiking rates and shrinking the central bank balance sheet are powerful actions in today's global predicament.

Higher oil prices, higher prices for internationally traded goods, incremental regulatory tightening and the abysmal velocity of money, pushed lower as activity in housing markets slows, are all co-contributors.

While the world needs US dollars to function, it is also directly impacted by the Fed's quest to tame inflation, whether anyone likes it or not. And only one actor has the power to print more dollars and increase the reserve currency's availability: the Federal Reserve.

Yes, you can bet your bottom dollar the Fed is keeping a close eye on what is happening in the UK, and elsewhere.

The full story is for FNArena subscribers only. To read the full story plus enjoy a free two-week trial to our service SIGN UP HERE

If you already had your free trial, why not join as a paying subscriber? CLICK HERE