MQG overvalued in the current market, page-3

Insightful and thoughtful post which is very instructive and from which everyone will benefit, I'm sure, irrespective of their positioning in relation to MQG.

Your post is a testimony to the way HotCopper should function - with differing views being freely expressed in order to deliver better investing outcomes for all (per the philosophy of, "the whole being greater than the sum of the individual parts.")

So thanks for taking the time to post your investment process irt to MQG.

One fundamental point of difference I have is in relation to this paragraph,

"1. Inflation is not transient. Fed potentially needs many more hikes than what they have admitted in the past. If you look at the "Taylor theory" and do the math to control 8% inflation you would need a rate of around 10%. ( not saying we will reach 10% but anything more than 3% will have serious issues.)This means we are significantly behind the curve. More rate hikes are required."


My contention is that while more rate hikes might be required, not nearly as many hikes as are necessary are going to be delivered.

Here's my current thinking (taken from a post on the CSL thread https://hotcopper.com.au/posts/61500193/single ):


After a decade of gorging at the debt trough (personal, corporate and also at national levels after governments across the globe borrowed trillions during Covid), the global economic system is today so addicted to capital liquidity that withdrawing just little bit of it, quickly induces nasty cold turkey symptoms.

No matter how hawkish central bankers have suddenly started to become in terms of combating inflation (they're many dollars short and many days day late!), they can't lift rates too much further without causing economies to break completely . (As it is, things are already starting to break after just 25bp to 50bp interest rate increases across the OECD over the past month or two).

So monetary authorities have have a choice of two painful paths:

1.) Try their damnedest to catch inflation. Because official rates are sooooo far behind inflation, going hard now to catch up with inflation (to do so will require rates to be multiples of where they are currently) will result in little short of economic Armageddon across the globe. (Contemplate a scenario of the Fed Funds rate rising by 300bp or 400bp from here, and how politically palatable that will be given the carnage it would wreak.)

or

2.) Let inflation do its thing [*]. This will also be economically painful, but the pain will be felt most at the lower rungs of society, which can be assuaged by government assistance and subsidies (in this age of universal political populism, it takes zero imagination to see governments borrow even more to soften the inflation blow on their citizenry).

[*] While applying mere token measures and jawboning about doing something about it, something at which increasingly-plutocratic central bankers have become masters.


My call is that Scenario 2) is starting to happen, and will continue.

And I'm not alone in thinking this: the behaviour of global bond markets in recent weeks appears to be pointing to the same conclusion.

Take the UK CPI print last night, which came in at an extraordinary 9%, a 40-year high.
Despite that sheer Brobdingnagian level of price rises, UK gilts actually initially rallied when the number came out, after easing back to close marginally down, and the yields on other OECD government bonds barely flinched.

A similar sort of "Meh" response happened in bond markets when the US CPI number (8.3%, also a multi-decade high) for April was announced last week.

Massive inflation numbers, yet benchmark interest rates respond with indifference.

That's what's known in the world of finance as, "High inflation is already being priced in."

Which, if the bond market is correct (and I have far more respect for bond market participants than equity market investors), means very negative real interest rates for some time to come. (For years, possibly).

And negative real interest rates are highly conducive to the valuation of risk assets, such as equities - and especially risk assets of the long-duration growth variety.

To summarise the evolution of market thinking in recent times:

Twelve months ago, the market was in total denial about inflation.
That view changed around 12 months ago.

The market was in denial that interest rates would need to rise (i.e., that inflation was merely...uh... "transient").
That view changed around 6 months ago.

The market then overshot and started to think that interest rates would rise a lot.
That view is busy changing now... the market is coming round to thinking that rates won't be able to rise by much.

The market thinks risk assets (especially long-duration growth) will continue to under-perform.
That penny still has to drop.
My call is that it will do so before too long.

So I think the chronic recent under-performance of growth stocks has come to end.




I often take my cues from the bond market because my experience over a long period of time has taught me that the bond market is far more astute than the equity market; and the muted behaviour of bond pricing in the face of recent very high inflation numbers I find to be decidedly noteworthy.

Feel free to rebut/critique .