The Big $hort
Comment of the Day

April 13 2022

Commentary by Eoin Treacy

The Big $hort

Thanks to a subscriber for this report from Zoltan Pozsar for Credit Suisse. Here is a section from the conclusion:

Paraphrasing Herodotus…

…”circumstances rule central banks; central banks do not rule circumstances”.

Inflation is a complex phenomenon, and it has nothing to do with DSGE models. Free-flowing commodities and commodity traders guarantee price stability, not central banks, and deflationary impulses coming from globalization shouldn’t be mistaken for central banks’ communication skills as anchors of price stability.

Luck is luck. Luck isn’t structural…

Luck is running out; central banks were lucky to have price stability as a tailwind when they had to fight crises of FX pegs, par, repo, and the cash-futures basis. Those were the easy crises. The ones you can print your way out of with QE.

But not this time around…

Inflation borne of shortages (commodities [due to Russian sanctions], goods [due to zero-Covid policies], and labor [due to excessive positive wealth effects]) is a whole different ballgame. You can’t QT or hike your way out of it easily…

…and if you can’t, credibility gets damaged, a decline of the U.S. dollar is inevitable, and shorting U.S. rates, the U.S. dollar, and some FX pegs make logical sense.

Eoin Treacy's view

There are a lot of moving parts in the markets today. Everyone is eager to come up with a narrative that cuts through the verbiage and illuminates a path to security and stability of mind and purpose. It’s not easy because there are so many conflicting ambitions. Most people can’t shake the feeling momentous events result in momentous, not necessarily fortuitous, outcomes.

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