Jerry is not Paul

While Powell fashions himself to be Volcker 2.0, structural differences in the labor market today vs. back in the late 1970s are a major blind spot. Stay risk off until he figures it out.

When Volcker finally broke inflation in the early 1980s, it is important to remember that he was dealing with a world before China hollowed out the US middle class, when labor unions had immense power and when demographics were favorable to add workers to the labor supply picture. This created the backdrop to allow aggressive monetary policy to break the wage/price spiral and ultimately bring down inflation ushering in the boom times of the mid-1980s. But it wasn’t monetary policy alone that led to this success. Volcker’s aggressive interest rate policy was further aided by the breaking down of union power during Reagan as well as more workers entering the global labor market with the tailwind of globalization that lowered the cost of labor for over 30 years.

Today we are entering a deglobalizing world, where re-shoring of domestic supply chains with local workers is necessary, where union power is bouncing off the bottom after decades of ineptitude and where demographic trends are moving in the wrong direction amidst an aging global population. It simply won't be easy to find cheap labor supply this time around. The days of cheap labor have come to an end. This is a structural inflation force that the Fed misses in its attempt to use their blunt tools of monetary policy via interest rate hikes to loosen up the extremely tight labor force and prevent the wage/price spiral from continuing.

Add to this a chronic lack of commodity resource investment (especially fossil fuels) due to ESG movement and ostracization of traditional energy players over the last several years, the need for duplicative supply chains in a growingly destabilizing world (where Russia is weaponizing commodities and China is weaponizing its control over the supply chain) and the chipping away of the $ as the hegemonic currency after the western world sanctioned Russia forex reserves and we have set the stage for a level of inflation globally that will be stronger for longer than policymakers are accepting.

The Fed remains woefully behind the curve in addressing the inflation that exists today and they will continue to be surprised by its stickiness and strength. The terminal rate needs to move materially higher in this setting in order to stomp out inflation. If we are to get real rates positive throughout the entire curve, we are likely going to need to see a terminal rate that is at least 100bps higher than we currently have. I believe bonds remain a sale as the Fed will be forced to do more tightening than it realizes now in order to address inflation and this will also lead to lower equities which get hit from lower multiples in a rising cost of capital environment as well as falling earnings coming from a growth slowdown with more profits moving upstream toward commodity producers. My portfolio remains risk off positioned and I am using rallies to sell stocks and bonds while accumulating gold, hard assets and bitcoin.

Current Positioning:

Macro Ideas

• Short IWM/EEM/EZU/EWZ via puts and futures

• Long gold

• Long crude calls

• Long Bitcoin

• Long KEUA (European carbon credit exposure)

Single Name Exposures

• Long MP/LNG/NOG/CCJ//STNG

• Short China related miners (BHP/RIO/VALE)

*Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.