Equities
Falling inflation enables central banks to pause rate hikes, which is good news. But time goes on. Restrictive monetary policy, Chinese debt-deflation, energy supply shocks, US and global policy uncertainty, and extreme geopolitical risks will undermine hopes of a soft landing and beautiful disinflation.
The stratospheric valuation of this year’s AI mania is likely to deflate, just as it did after the Web 1.0 mania of the late 90s. We go through some long-term and short-term investment implications.
Positive economic surprises have delayed the onset of recession in the United States. But tighter monetary and fiscal policy, slowing global growth, and a looming rebound in policy uncertainty and geopolitical risk suggest that investors should buy insurance while it is cheap.
On one hand, China will be exporting deflation to the rest of the world. On the other hand, core inflation is sticky in the US, making the Fed err on the hawkish side. Altogether, these crosscurrents are creating a toxic mix for risk asset prices.
