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Alfonso Peccatiello: The Fed Wants to Create Demand Destruction

Tom welcomes back Alfonso Peccatiello author of the Macro Compass Substack to the show.

Alf explains his global credit impulse model which measures capital flows during the credit creation cycles of central banks. We are currently in the third part of this cycle where you need to be defensive. He’s currently short some equities and expects a drop in housing prices. Investors should increase their dollar reserves and consider holding gold.

When things improve then credit becomes more available which increases economic activity but simultaneously begins to build risk. Stability therefore inevitably leads to instability due to leverage and margin calls. We’re seeing some of this activity now brewing beneath the surface.

He explains how credit spreads work in his educational materials on his website. Spreads are important for corporate lending and are used to assess the creditworthiness of the borrower. When these spreads widen corporations have to pay more due to perceived risk. Higher lending costs may impact business models and result in companies losing access to credit. Currently, these spreads are widening.

Many zombie businesses will soon go under, and this will impact equities. These companies will be unable to afford higher rates. The weakest market is probably the Russell 2000, but most will be affected. Many companies have cash flow and valuation problems.

He explains the term bond vigilantes and the idea behind global macro vigilantes.

He expects a recession to hit Europe this year, and we already see consumer purchasing power declining. Europe is also heavily affected by energy inflation. The Euro is starting to reflect this economic weakness.

Real estate markets are looking weak globally, and they are likely to drop somewhat in the coming months.

He discusses where markets and gold should head in the coming months. Much of it will depend on the direction of inflation, bonds, and the Fed’s policies.

Talking Points From This Week’s Episode

  • The four quadrants of his global credit impulse model.
  • Why stability tends to create instability in credit markets.
  • Outlook for Europe and the global real estate markets.
  • Factors that will affect gold include bonds and Fed policy.

Time Stamp References:
0:00 – Introduction
0:44 – His Macro Model
3:16 – Defensive Trades
4:29 – Stability Vs. Instability
7:30 – Credit Spreads
10:55 – Equities & Impacts
16:40 – Global Macro Vigilante
19:36 – Yen Performance
25:05 – Europe & Recession
27:19 – C.B. Credit Rating
29:45 – Fed Hikes & Real Estate
34:56 – Getting Defensive
36:45 – Safe Havens & Risks
42:08 – Deflation Event?
43:52 – Wrap Up

Guest Links:

Alfonso Peccatiello is a former head of a twenty-billion-dollar Investment Portfolio and is a passionate global macro investor. He writes The Macro Compass, a financial newsletter providing actionable investment ideas and unique macroeconomic insights to enhance the risk/return of your portfolio.

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