Pro Perspectives 11/2/21

November 2, 2021

Stocks close on yet another new record high today.  Yields traded lower.  And commodities were mostly lower. 

This, as the big Fed decision will come tomorrow.

And this, as global government and corporate leaders are meeting in Scotland on the global climate action agenda. 

So we have two competing forces at work here.  

The Fed, and other global central banks are ending emergency policies, which will then lead to a normalization of global interest rates, at best.  At worst, it will turn into an aggressive rising interest rate environment (i.e. an inflation fighting campaign).

Simultaneously, global governments are pledging to fund the green energy transformation.  In the face of record global indebtedness, they will be doing more deficit spending, just as funding debt and deficits is likely to become more and more expensive (with rising interest rates). 

Is it a collision course for sovereign debt defaults?  

Not if they (global governments and central banks) are all coordinating/ cooperating.  And they are (for the moment). 

To be sure, they will borrow and spend.  But we may find that central banks do not aggressively raise rates to combat inflation.   As we've discussed in prior notes, they may let higher prices resolve the "higher prices problem."  That means we will be left to deal with a very hot period of inflation, until the consumer finally capitulates and stops consuming.  

In the meantime, the global reset of prices (higher) will continue to reset the value of economic output, higher (i.e. higher nominal GDP).  And that will start shrinking global debt/gdp.  This was the strategy all along, from the outset of the pandemic policy response:  inflate away debt, and the value of the money in your pocket. 

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