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digital daily: Contrarian

Macro Mondays – Contrarian: Contrarian views are often romanticized as rebelliously right. The ones who saw things others couldn’t. But orthodox logic, clouded by a momentum mindset, should take you down a contrarian path. Covers of magazines are classic signposts, as the Economist acknowledged of their own work. The stories of the day – the Fed “Can’t Stop, Won’t Stop” (Bloomberg) and “The Powerful Greenback” (Barron’s) – are a tired consensus. Despite this cycle bearing no resemblance to recent ones, there is a strong tendency to observe it through historic analogs – usually the 1970s. Market sentiment is surprisingly compliant. Asset valuations are expected to adjust, and everything will go back to “normal.” This is powerfully evident in bond markets. US real interest rates are priced to converge at 1.25% in the medium term, and inflation to return to 2%. It is healthy – and contrarian – to question the conviction in this benign expectation. Today, bond markets are subject to a global margin call in the least suspecting places – zero-risk-weighted sovereign bonds in developed economies, where financial intermediaries are incentivized to use leverage. The Bank of England reasoned that the absence of intervention to buy government bonds, the opposite of their strategic plan, would have propelled the pension system into bankruptcy. Intervention was the lesser of the bad options. Germany, Europe’s largest creditor, has seen sovereign spreads to euro swaps jump to an extreme –worse than the 2011-2012 European debt crisis and Great Financial Crisis. This is far from normal. Our Macro Pulse fell to the lowest possible reading last week, raising warning flags. Of course, evidence of strain brings you closer to an inflection point. Digital asset markets wait patiently in the background for macro clarity, having lived through its global margin call earlier this year. Even contrarians accept it is darkest before dawn.