Forward Guidance
April 26, 2025

Stagflation Is Back—And Bonds Are Toast

This podcast dives into the murky macro waters, arguing that stagflationary forces are gathering steam thanks to persistent trade tensions and runaway deficits, creating a treacherous environment, particularly for bonds. The speaker, operating as a tactical macro trader, outlines a cautious approach for navigating the choppy markets ahead.

The Looming Stagflation

  • "You have the two biggest economies in the world with trade embargos on each other... In my framework, I see this as stagflationary."
  • "It doesn't mean it's exactly like the 1970s... but it just means we'll have some stagnant growth with inflation."
  • Persistent US-China trade tensions, with potential minimum global tariffs, create a material drag on global trade, fueling inflation and hindering growth. The idea of returning to zero tariffs is off the table.
  • This isn't a direct 1970s replay but signifies a challenging mix: economic growth stagnates while inflation remains stubbornly high.
  • Runaway government deficits add fuel to the inflationary fire, contributing to the overall stagflationary pressure cooker.

Bonds Look Broken

  • "...the deficit story... only adds to the bond bearishness that I think will prevail over the course of this year."
  • "I think the bond market... is sniffing out the permanence of these things that deficits are out of control forever and that inflation is not getting solved and is sticky... that's also bearish bonds."
  • The bond market is increasingly pricing in the permanence of out-of-control deficits and sticky inflation, creating a structurally bearish outlook.
  • Even potential improvements in economic growth are viewed as negative for bonds in the current high-inflation context, as it might delay potential rate cuts or even invite tightening.
  • The speaker sees opportunities to actively short bonds, betting on yields rising (prices falling) further.

Navigating Choppy Equity Markets

  • "I think equities are just going to have these headwinds throughout the year... it's hard to see a sustainable bull run."
  • "I think you look for opportunities to rent the market, not to own it."
  • The "Goldilocks" scenario that previously benefited equities (moderate inflation, dovish Fed, AI hype) is over, replaced by significant headwinds.
  • Expect a choppy market, potentially ending the year flat, rather than a smooth bull run. The strategy shifts from long-term holds ("owning") to tactical trades ("renting").
  • Given the wide range of potential outcomes and high uncertainty, maintaining a lean portfolio (fewer positions), holding substantial cash reserves, and staying responsive to market extremes is crucial for traders.

Key Takeaways:

  • The confluence of sticky inflation, stagnant growth prospects driven by trade wars, and permanent-seeming deficits paints a challenging picture. Bonds face a particularly bleak outlook, while equities are set for a choppy ride best navigated tactically.
  • Stagflation Alert: Prepare for an environment where growth disappoints and inflation persists, driven by structural trade and fiscal issues.
  • Bonds = Bearish: The structural case against bonds is strong; rising yields look likely as deficits and inflation bite. Consider shorting opportunities.
  • Trade Tactically, Stay Lean: In equities, favor short-term "renting" over long-term "owning." Keep positions light, cash high, and be ready to react to volatility.

For further insights and detailed discussions, watch the full podcast: Link

This episode unpacks a cautious macro outlook, forecasting stagflationary pressures driven by trade tensions and persistent deficits, signaling significant headwinds for equities and bonds, demanding a nimble strategy for investors in risk assets like Crypto and AI.

Tactical Trading vs. Macro Reality

The speaker distinguishes between their long-term macro view and short-term trading actions, noting they are currently "tactically long" equities despite broader concerns. This highlights the need to trade immediate market conditions ("trade the tape") while acknowledging underlying risks. The current market sentiment appears to be cooling off temporarily, but fundamental issues remain unresolved.

Trade Tensions and Global Impact

Persistent trade friction between the US and China remains a core concern, even with recent minor de-escalations involving India, Japan, and South Korea. The speaker emphasizes that proposed tariff scenarios, such as a potential return to 60% on China and a 10% minimum global tariff, represent a significant shift away from previous optimism about zero tariffs. "What is the deescalation scenario is returning the tariff rate to 60% on China. This is still enormous," the speaker states, underscoring the material impairment to global trade expected.

The Stagflationary Framework

The speaker frames the current economic environment as stagflationary – characterized by stagnant economic growth coupled with persistent inflation, though not necessarily mirroring the extreme conditions of the 1970s. Stagflation combines slow economic growth (stagnation) with rising prices (inflation), creating a challenging environment for policymakers and investors. This outlook suggests inflation won't be easily resolved and growth will remain subdued.

Bond Market Bearishness

The combination of uncontrolled government deficits and sticky inflation fuels a bearish outlook for the bond market throughout the year. The speaker believes the market is recognizing the permanence of these issues. Even potential improvements in economic growth are viewed as negative for bonds in this context, suggesting yields may continue to face upward pressure, impacting borrowing costs and discount rates used in valuing investments, including Crypto AI ventures.

Equity Market Headwinds and Choppiness

Equities face significant headwinds, marking an end to the previous "Goldilocks" scenario where moderate inflation didn't trigger Fed tightening and growth scares prompted quick rate cuts. Factors like the AI boom and favorable fund flows previously supported equities, but the speaker anticipates a choppy year ahead. While a major crash isn't guaranteed, a sustained bull run seems unlikely, suggesting investors should "rent the market, not own it." This implies a cautious approach for risk assets generally.

Dollar Weakness and Strategic Positioning

Amidst these dynamics, the speaker anticipates material weakening of the US dollar. Strategically, this informs looking for opportunities to short bonds. More broadly, the speaker advocates for a highly defensive and reactive portfolio posture: maintaining very light positioning (reducing the number of active investments significantly), holding a large cash balance, and preserving the flexibility to react decisively to market extremes, such as spikes in volatility (VIX).

Navigating Uncertainty with Flexibility

The speaker stresses the unusually wide range of potential market outcomes given the current macro complexities. "The range of outcomes is really really wide," they note, reinforcing the need for a lean, responsive strategy. Having a good start to the year allows for this cautious stance, avoiding the need to chase returns. For tactical macro traders, and by extension investors in volatile sectors like Crypto AI, maintaining flexibility and cash reserves is crucial to navigate potential dislocations and capitalize on opportunities arising from extreme market moves.

Conclusion: Prepare for Volatility and Maintain Flexibility

The core insight is that stagflationary pressures and trade uncertainties create a challenging, choppy market environment, particularly for bonds and potentially equities. Crypto AI investors and researchers should prioritize capital preservation, maintain significant cash reserves, and adopt a flexible strategy to navigate heightened volatility and react to market extremes.

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