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Julian Brigden: Is the Fed Too Politicized to Kill Inflation?

Tom welcomes Julian Brigden to the show. Julian is Head of Research at Macro Intelligence 2 Partners.

Julian discusses the Feds options, including “Opportunistic Disinflation” to drain the inflation from the system. He believes it will take years to correct inflation and will likely be a painful process. The issues are not so much inflation, but nominal GDP. Most of GDP is based on the labor market and consumer behavior. The Fed understands the situation very well and they expect higher unemployment.

We don’t know the exact approach the Fed is taking and if they are considering how inflation played out in the 1970s. The Fed today is very politicized and what happens towards the end of the year when we have higher unemployment and are heading into an election cycle. He says, “We’re now fighting a kinetic war with Russia, a Cold War with China, and a war with climate change. Arguably, the dynamics today are far worse than in the 70s.” The Fed will have to decide just how independent of the government it is. The Fed is trying to steer the supertanker, while most investors can change course much faster.

Mortgage applications have just dropped to the lowest levels since 1995. We’re seeing higher than normal cancellations in the home markets. We’re heading for a good old boom, bust market cycle in the sector.

The ECB is miles away from viable rates, arguably, as they are currently minus 300 basis points in real terms. We’re in uncharted territory, and he discusses the German bond situation. All these sovereign bonds are basically interchangeable, so they all affect each other.

A weaker dollar would be very supportive for gold and especially silver. He explains the differences between the silver and gold market. Silver tends to outperform in inflationary environments.

We’re in a structural bond bear market, be disciplined because passive investing will be heavily punished going forward.

Timestamp References:
0:00 – Introduction
0:41 – Rates & Feds Approach
8:43 – Nominal GDP Issues
11:14 – Inflation Today Vs 70s
17:19 – Fed Reactionary
19:50 – Housing Markets
25:50 – Europe/ECB Impacts
33:54 – BRICS & Reserve Status
37:13 – Yields & Gold
39:57 – Gold/Silver Differences
43:31 – China & Deglobalization
46:55 – Trading Cautiously
48:39 – Wrap Up

Talking Points From This Episode

  • The Fed is very politicized and this could have a major effect on how they approach inflation.
  • Mortgages applications are at their lowest level since 1995, indicating a possible coming bust cycle in the housing market.
  • Yields are at historic lows and silver is especially likely to perform well in an inflationary environment.

Guest Links:

Julian Brigden is the Head of Research at Macro Intelligence 2 Partners, a firm he co-founded in 2011. He leads a six-person team of research and market professionals to publish independent macroeconomic research that is both ahead of market consensus and timely. Julian has over 30 years of experience in financial markets including positions in market and policy focused consulting to institutional investors as well as FICC sales.

Julian is a trusted advisor to many top money managers who use MI2 Partners’ research to guide their investment process. He has extensive experience with macro data analysis, broad fixed income, equity market (not individual stocks) and currencies. He is particularly skilled at exploring correlations in the economy and financial markets vital to a vast array of investment decision-makers. As a global macro strategist, Julian’s primary focus is understanding and explaining macroeconomic and policy-related developments to tell clients what is important in markets and what to fade.

When asked about his market outlook for 2022, Julian stated that the US policy response was massive. As a result, the economy has closed the output gap and is in danger of overheating. Together with inflation, Julian believes that this means the Fed needs to rapidly tighten policy while slowing growth. As rates rise and the balance sheet shrinks, the risks to very overvalued asset prices, especially stocks, will rise. He then stated that in Europe, as the impact of Omicron fades and the inventory cycle surges, the ECB will need to raise rates, which will add to the pressure in global bond markets.

With regards to market shifts and the issues he feels are not addressed in the media, Julian mentioned that there is a significant risk that we are entering a period of extended volatility. The most analogous period was in the late 1960s, when we saw greater economic and market cyclicality. As foreign interest in Treasuries has waned, he believes that the current US account deficit has been funded via purchases of equities. Thus, if US equities do correct, it could put considerable pressure on the dollar. With this in mind, Julian says that the MI2 Research team will continue to advise clients to be short fixed income in the US and Europe, together with high yield credit. Finally, they have suggested being long volatility in a few places.

Julian spent five years at Medley Global Advisors from 1999 to 2004, a leading macro policy intelligence firm, as the Managing Director of the G7 Client Team, providing timely trading recommendations. From 2004 to 2011, he served as North American Head of Hedge Fund Sales at Crédit Agricole. He has worked in London, Zurich, New York and Vail at UBS, Lehman Brothers, HSBC, Drexel, Credit Suisse, and Salomon Brother in foreign exchange and precious metals.

Throughout his career, he has been featured on many big media outlets such as Bloomberg, CNBC, Fox News Business, Real Vision, the New York Times, Wall Street Journal, and Barron’s. Discussing macro research topics that are driving prices in global bonds, equities, commodities, and currencies.

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