Macro Musings by Danny D joined me for a Substack live, and these are the 5 biggest takeaways from our conversation:
1. The low rate world was the anomaly, and it isn't coming back.
Danny explained why rates stayed so low for so long, and why those forces have flipped:
Last cycle had baby boomers in their peak saving years and households repairing their balance sheets after 2008, and both pushed rates down.
This cycle, household wealth is up nearly $70 trillion and the boomers are spending their retirement savings instead of adding to them.
The savings rate sits at 3% versus 8% last cycle, even with rates far higher.
What to do: Stop waiting for 2021 to come back and start valuing stocks like capital costs something again.
2. The Fed just changed its rulebook, and we're back in June 1999.
Danny thinks last week's FOMC was a paradigm shift, and I agree:
Warsh called the neutral rate an academic exercise and described the hike as removing accommodation, which means the Fed thinks policy is still loose.
The Fed is now watching nominal GDP, which has gone from 5% to 6.6% as of Q2.
There's no forward guidance anymore, so the market has no idea how far this goes.
Greenspan ran the same playbook in 1999, and stocks and bonds played ping-pong until the 10-year hit 6.75% and things broke in March 2000.
What to do: Get out of long duration, high multiple and consumer stocks before financial conditions finally tighten.
3. The inflation gauge Wall Street trusts is broken.
Break-evens have sat at 2.5% the entire cycle, no matter what inflation prints.
The Fed bought far more 10-year nominals than 10-year TIPS during QE, which mechanically squeezed break-evens tighter, and now it reads that same market as proof inflation expectations are anchored.
The University of Michigan survey has inflation expectations above 7%.
What to do: Stop plugging break-evens into your models, and stop trading off the second decimal of a CPI print.
4. Scott Bessent is out of tricks.
Danny walked through the levers Bessent has pulled, and each one has stopped working:
Oil deal headlines can't move prices anymore because inventories are drawn down and diesel and jet fuel are a mess.
DOGE and tariff promises can't talk yields down anymore.
A weaker dollar is his last lever, but with the 2-year up from 4.3% to 4.93% and import prices running 7%, pushing the dollar down just feeds inflation and hurts bonds anyway.
What to do: Fade him. The day he doubled the buybacks, I called it a call to short more bonds.
5. The market is screaming that policy is too loose.
The 10-year has gone from 4% to 5.2%, and credit spreads haven't budged.
Stocks are near all-time highs, up over 80% since the Fed stopped hiking in 2023.
$95 oil and a ripping dollar haven't dented anything.
What to do: The Fed has a lot more work to do, so own gold, gold miners, energy and copper, and run from consumer and tech. Danny thinks gold is dead money until the Fed starts cutting, and I think he's early on that call, but we both agree the 60/40 portfolio is the wrong place to be.
