Macro Observations

I want to make one thing abundantly clear if it isn’t already. Inflation is a problem. While most of the market’s attention is focused on metals and oil and industrial goods, there's an area that’s contributing just as much to the problem - agricultural commodities. Through all of this, agriculture prices have tied closely to long-term rates. And we’re getting to the point where we might be entering the next leg higher for both.

What happened after Powell spoke in December wasn’t as much about economic dynamics as it was about the wealth effect. By igniting a huge rally in stocks, the Fed has effectively liquified the system, not by printing dollars this time, but by blowing up brokerage statement balances. In short, it’s the wealth effect that’s been driving higher inflation. Therefore, it makes the most sense that if you want to reverse the rise in inflation, you have to reverse the wealth effect.

Inflation is far from the only consequential left tail risk that’s out there right now. In fact, I’d argue that it’s not even the biggest risk factor facing investors right now. I’ve talked about preparing for the credit event for a while. I think it might finally be getting close. Let’s run down the evidence piece by piece.