From quoting Emerson in last week’s title to Shakespeare today – down now 7 weeks in a row, blood in the streets, it’s that kind of market. The recession question does seem like the question of the day – after months of near slavish fixation on inflation, the focus has shifted to the growth side. In our topsy turvy world it makes sense that the speed of this redirection should be very fast. From transitory inflation to anticipatory recession, from real economy inflation to asset deflation.
One can see the shift in the cross asset price action as all of a sudden bonds, which have been on a relentless selloff since year end, have calmed with both the short and long end pulling back from recent rate highs. Inflation expectations have come way down as we noted last week as have break evens. It makes sense right – if one is worried about growth then it makes sense to become more sanguine about inflation.
We have been discussing the pitched battle between the two camps of inflationistas and growth bears and its pretty clear that growth bears have taken the upper hand as the bullwhip effect, discussed back in the early days of supply chain snarl, lashes the US retail sector resulting in some ugly company specific and sector specific price action. Last weekend’s twin barrel recession/stagflation warning from the B& B boys: Bernanke and Blankfein, set the tone.