Thread by Teddy Vallee

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We put out our quarterly note to our LPs last week.

Here’s an overview:

1/x
We see fiscal as a new form of monetary policy, which will shift growth and inflation profiles higher. This is a complete 180 from the past 10 yrs of consumer deleveraging & fiscal austerity. Capital likely to flow to areas of the world with higher beta to NGDP & inflation.

2/x
Interestingly, this view is in-line with our forward return models. $EEM > $SPY

3/x
High probability of a second Fed policy error. First was not recognizing strength in economy and subsequent inflation. Second is over tightening into materially slowing growth and inflation.

4/x
Our leads are straight lower for next 12-14 months in US; however, the macro backdrop is evolving at a much faster pace given Covid and subsequent policy responses. Slowdown likely to happen 3-4x faster given the velocity of rate move.

5/x
30-year mortgage rates +262 bps in six months. 2s +272 in six months. Fastest moves since early 1980s when nominal growth was +12% and inflation +8.6%.

6/x
Leading consumer data already showing real PCE likely to be negative. Historically associated with recession.

7/x
50/50 stock bond portfolio down 17.9% on 4 mo ROC, marginally worse than 09. However, given growth in financial assets, 52% of GDP erased today vs. 29% in 2008. Highly likely to hit spending given 80% R squared between HH net worth and fwd consumption.

8/x
Over next 9-12 mos, we see inflation moving materially lower & settling at 3-4% for a prolonged period of time. Inflation broad based (83.4% of 250 CPI constituents above Fed’s 2% target); however, autos, shelter, & energy make up 5.8% of 8.6% headline & very likely to fade.

9/x
Auto demand is likely to get crushed over next 12 months, which should solve any supply demand mismatches itself. In addition, industry execs indicating supply chains back up and running.

Possible we see a negative auto print.

10/x
Housing has high probability of fading based on leads.

11/x
We have the least conviction on energy, but comps (assumes flat prices) will drive CPI contribution from 2.5% today to 1% in October and 50 bps by end of Q1.

12/x
Retail inventories ex autos are 20% above 2 yr avg. Double prior high of 7.2%. We find that this leads by 14 months and implies sharp decline in prices in months to come.

13/x
We can see both long and short rates moving down as fast as they rose as soon as the mkt understands the extent to which we are slowing and the likely drop off in excessive inflation levels to high, but signficantly lower levels.

Market internals already imply this.

14/x
Feel free to reach out with questions comments info@peravlleglobal.com

15/15
Fumble at the 1 yard line.

info@pervalleglobal.com vs. the one above.
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