Alfonso Peccatiello: Immaculate Disinflation or a Serious Crash?

Tom welcomes back Alfonso Peccatiello author of the Macro Compass Substack to the show.

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Alfonso is predicting a recession in the US starting in May or June of this year. He bases this prediction on three indicators - the frozen housing market, the Fed’s attempt to engineer tighter financial conditions, and the reaction of central banks to inflation. He also talks about immaculate disinflation, which is an environment where inflation comes down rapidly without a recession. The market is pricing this, which means people are selling insurance trades like the dollar, volatility, and cash, and buying high-beta stocks. Alfonso disagrees with this take and believes a recession is still more likely than a soft landing.

He notes that the stock market usually bottoms before earnings bottom, and that valuations start to rise as the Fed cuts rates. He believes that a true bull market won't be seen until 2024, and that people should be wary of trying to anticipate the Fed's pivot. He also notes that the bond market underpins everything in the current financialized economy. The amount of debt between private and public sectors is 300-400% of GDP and bond yields are the price of the cost of borrowing. An inverted yield curve has hardly ever mis-forecasted a recession, and he cautions against believing that “this time is different”.

Finally, he talks about net liquidity decreasing due to the Fed running off its balance sheet. The Treasury General Account is taking the hit instead of reserves, but once the debt ceiling debate is resolved, the Treasury General Account will need to be replenished. This will cause a double whammy effect on liquidity between June and December, with quantitative tightening running on the background. Ultimately, the Federal Reserve’s running off its balance sheet removes liquidity from the system.

Alfonso also talks about how to avoid getting stuck in a narrative and what data should be paid attention to. He recommends self-awareness, training oneself to not think that one knows everything, and building a macro process and data-driven macro process. He advises looking for episodes of extreme market conviction, as it allows one to understand when things are getting stretched and when people are assigning too much conviction. He also encourages people to become active macro investors, as this is a much more complicated investing landscape than before.

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Talking Points From This Week's Episode
- Alfonso predicts a recession in the US starting in May or June of this year, based on three indicators.
- The market is pricing in a soft landing but more likely a true bull market won't be seen until 2024.
- He advises looking for market conviction, examining the macro environment, and develop market self-awareness in order to understand the complex financial landscape.

Time Stamp References:
0:00 - Introduction
1:05 - Base Case For Markets
4:30 - Immaculate Disinflation
7:44 - Recession Insurance
9:53 - Expectations & FOMO
19:12 - FED Timing & Pivots
21:55 - Macro & Bond Markets
25:29 - Yield Curve Inversion
29:38 - Fed Balance Sheet
35:05 - Narratives & Data
39:40 - Risks & Wrap Up

Guest Links:
Website: https://www.themacrocompass.com/
Twitter: https://twitter.com/MacroAlf
Substack: https://TheMacroCompass.substack.com

Alfonso Peccatiello is the Founder & CEO of The Macro Compass, a disruptive investment strategy firm whose mission is to democratize professional macro analysis, tools and portfolio strategy.

The Macro Compass leverages Alf's experience running large pools of institutional money and offers financial education, unique macroeconomic insights, and actionable investment strategy.

Before launching The Macro Compass, Alfonso was the Head of Investments for a $20 billion portfolio for ING Germany.