Interesting conversation with Nomura's Charlie McElligott Friday. He was telling me that he sees the risk of a pro-cyclical (“Value,” “Risk” and “Reversal” factors) move coming at the cost of “Growth” and thus, “Momentum” /1

His point: “reflation” doesn't necessarily connote stocks higher, nor does it connote "Risk-on" and lower volatility. Instead it could mean a reset of the "Momentum" trades du jour: growth, bull flattening, etc /2

One scenario: a (temporarily) successful reflation (temporarily) boosts pro-cyclical aka "Value", causing people to rebalance into “Growth” aka “Momentum”. At the same time, it causes bear steepening, and, thus a reversal of the current trend /3

The bottom line: the "everything rally" with stocks, bonds, gold and bitcoin all trending higher isn't a de facto reflation trade. It could actually be a "stagflation" max monetary scenario. I say we find out better in September. Charlie agrees. On @RealVision tomorrow /end

Addendum: The McElligott video is now live on @RealVision

Charlie McElligott – Macro’s Seasonal Shifts and the Volatility Compression Slingshot https://www.realvision.com/shows/investment-ideas/videos/charlie-mcelligott-macros-seasonal-shifts-and-the-volatility-compression-slingshot?source_collection=8e80b18fdb074555bdd47d97e73fbe91 /1

I saw Charlie had a note highlighting how his thesis is already playing out:

"USTs and Bunds are bear-steepening with real yields higher (thus Gold smoked -2.1% and XBTUSD -1.2%) and Equities showing further extension of that same “Value over Growth” Momentum unwind move" /2

"“Inflation expectations” are beginning to adjust higher—Inflation swaps in U.S. and Europe (fickle traders, no doubt) are beginning to tell a story of nascently accelerating global views towards forward inflation"

That's bear steepening since the front end is pinned at zero /3

Also note that the US PPI came out worse than expected this morning, up 0.6% m-o-m ahead of 0.3% expectations. The worry is this will pass through to consumers just as the fiscal cliff crushes income /4

I'd be remiss if I didn't highlight the blog post by @Convertbond on what bear steepening means for the Momo stocks du jour. See here: https://www.thebeartrapsreport.com/blog/2020/08/10/6654/ /5

Let's quote @Convertbond here:

“Any hint of inflation can DRAMATICALLY alter the company’s valuation built on a high terminal value element.”

Would love to get him together with @RaoulGMI to discuss this in greater detail

/end addendum