Inflation: Inflation, rising dollar, Fed rate hikes, tighter financial conditions – these are yesterday’s trades. The FOMC is widely expected to hike 75 basis points at this week’s meeting. All eyes are on guidance into the Fall as the global economy speed-walks into a recession. Pessimism is extreme. Global growth expectations fell to an all-time low in July’s BOA Fund Manager Survey. The timing is unusual – in the past two cycles, it took the realization of recession for investors to turn this bearish. Asset allocation mirrors growth sentiment, with the lowest equity allocation since the GFC and the highest cash allocation since 2001. But it isn’t a one-way street. There are cracks emerging in the bearish trend for risk. Goldman’s hedge fund basket of “very important shorts” bottomed Jun 16, right after the peak in 10-year bond yields. Statistical analysis reveals that market risk is the driving force behind the short basket, not sector and industry factors. And inflation is dominating market risk through the Fed reaction function. Signals are shifting fast. Long-term inflation expectations are close to 2%, enough for the bond market to anticipate a Fed pivot to easing by the first quarter of next year. Digital assets remain at the frontier – recently led by Ethereum on enthusiasm about the transition to proof-of-stake. The easing in credit conditions is welcomed by those markets. Don’t extrapolate. Every cycle is different. Hopes that Fed easing brings everything “back to normal” will almost surely be dashed. Every cycle is different. Debt, demographics, supply chains, and economic security in food, energy, and technology are all features unique to the current cycle. Cycles are prone to burning hotter and shorter. Digital will stay on that frontier.