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Nov 05
Fuel for (Over)heating…and more of My Favorite Themes for 2018

​Tuesday, October 23, 2018

Speaker: Jeffrey Rosenberg, CFA

  • Environment in 2018 is a bit different than we've had since the GFC – may require some changes to your approach
    • High rates mean cash is a viable asset to hold for the first time in a decade
    • Volatility may be higher
    • The market will begin to worry about both growth and inflation as the cycle extends
      • Bonds can hedge growth concerns, but not inflation concerns.
    • Financial conditions are tightening as a function of fed policy
      • Risks for equities higher in that environment

  • Future Fed moves may depend on the data
    • Fed governors appear sensitive to strength in the economy
    • High inflation is still a fear as labor markets tighten, but offsets remain
      • Globalization and cheap labor
      • Ability to automate as wages grow also helps offset this

  • Biggest near-term risk is a mid-cycle rate tantrum
    • If equities go down because of inflation fears, bond holdings don't offset that type of risk – means both sides of the portfolio could be hurt
      • May need to make sure clients understand this
    • Long-term, still no signs that the market is expecting high levels of inflation, however

  • Ultimately, cycles end because of financial shocks or overheating in the general economy
    • Not a lot of signs of either at this point
    • Shadow banking system risk is increasing however – private debt issuance very high
      • Could be the place where we first see issues
    • Some chance that rates risk 50-100 bps as both inflation and real rates rise – that could be difficult for markets to handle


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