Podcast: Regime Change

Was the wild week for equity factors and Treasuries due to the growth mix shift?Please listen to our weekly podcast summarizing our September 15 note and consider becoming a paid subscriber, if you are not already, to read the full report. If you are a recent free subscriber and would like a 30 day trial, please email me at [email protected] week’s analysis of mortgage-backed security prepayment risk, known in fixed income circles as convexity, and 44 basis point increase in nominal 10-year Treasury yields is a reminder that the probability distributions of security returns have fat tails.  There was of course, an even more statistically significant event obfuscated by a move back above 3000 for the S&P 500, the reversal of momentum relative to value stocks.  We could not help considering how quickly conditions can change as the Treasury released the August budget report showing the first trillion dollar deficit since 2012 primarily attributable to a bipartisan agreement to allow spending growth of 7% while receipts grew at 3%.  Meanwhile ‘Modern Monetary Theorists’ postulate that there is virtually no limit on the amount of debt the Treasury Department can sell due to our status as the world’s reserve currency and Presidential candidates engage in a multi-trillion dollar bidding war to address climate change.  We continue to believe shortly after the 2020 election, when it becomes apparent that the US deficit and debt are rising simultaneously, like in the early ‘90s and early ‘10s, the markets will force a political crisis that both parties will agree to ‘resolve’ by hiking taxes.  Unfortunately, unlike the early ‘90s, the debt will be rising due to structural rather than cyclical factors, therefore no change to tax policy short of a national consumption tax will be able to close the gap.  Read my lips, no balanced budget and too much debt does not matter, until it does.Alas, we digress.  The question we are going to consider this week is whether the high velocity rise in yields, despite an aggressive ECB easing package, and tectonic shift in equity factors and sectors, is a result of the mix shift in US growth and evidence the consumer price Phillips Curve has a ‘faint heartbeat’.  Since the global financial crisis, each time we have closely examined growth relative to value or large relative to small caps, we have concluded that relative performance of these factors was a function of economic sector underlying fundamental and policy factors.  The latest extreme outperformance of momentum, growth and large caps and violent reversal, is largely about the technology and financial sectors with bond surrogates and energy playing a secondary role.  This week’s note will focus on the implications of the 2019 growth mix shift and increased inflation for our secular and cyclical views on technology, financials, stocks with bond-like characteristics and energy.Barry C. KnappManaging PartnerIronsides Macroeconomics LLChttps://ironsidesmacro.substack.com908-821-7584https://www.linkedin.com/in/barry-c-knapp/@barryknappThis institutional communication has been prepared by Ironsides Macroeconomics LLC (“Ironsides Macroeconomics”) for your informational purposes only. 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