Baus Research Highlights #1

Happy 4th of July! 🎆🎇

Dot dot dot… Plots!

In the most recent Marc to Market, the Fed dot plot is discussed as eventually having a weaker signal.

Ever since the "dot plot" was introduced in the aftermath of the Great Financial Crisis, Fed chairs have consistently played down their significance.  Not to be confused by the facts, many market participants insist on putting undue emphasis on the Fed's dots.  Many seem to hear Fed-speak through the prism of the dots, so to speak.

I believe that the Fed dot plot will become less important as we go into normal market conditions: which is when fundamentals like GDP return to their historical YoY growth trends.

However, this is exactly what Nordea doesn’t expect. Nordea is one of those market participants looking for the FOMC June meeting minutes to talk about the dot plots.

FOMC minutes could hopefully include some more hints on the newly started tapering discussions and whether the increase in rate hike dots for 2022 and 2023 also had any impact on the broader discussions (Wed).

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Inflation is out of the Fed’s hands

There’s a little known report out of Merrill that’s free called the Capital Market Outlook. It has become one of my favorite pieces to read.

In the most recent report, there is a complete history about how M2 growth relates to CPI growth… and how every time we get a 2 standard deviation move in M2 growth, we always get double digit CPI growth.

More specifically, they line this up to be short USD. Check these three quotes from that report out:

Every time money growth has exceeded trend by two or more standard deviations, money has lost 20% to 50% of its value within a few years.

The history since 1900 shows such rapid money-supply growth has always been associated with double-digit inflation. While many today seem to think this time is different, the three-standard deviation surge in money-supply growth over the past year suggests otherwise.

The current generation of new investors is especially vulnerable to the “money illusion” of a bull market propelled by massive money printing. If the S&P 500 index rises from 4000 to 5000 and inflation erases 25% of the dollar’s purchasing power, then the market is essentially flat in real terms despite its surge to eye-popping levels.

I recommend reading the entire document so much, that I’ll make a button for it.

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PIMCO on board with Merrill

PIMCO’s latest major market outlook is summed up in three points:

1. Peak economic growth

2. Peak coronavirus growth

3. Peak inflation growth

Essentially if you want a very detailed explanation of investment themes very similar to this Merrill’s Capital Market Outlook, then I’d describe PIMCO’s outlook like that.

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