MacroVoices #364 Julian Brigden: On Opportunistic Disinflation
Julian Brigden discusses his outlook for a prolonged period of restrictive Fed policy, warning that the central bank will pursue 'opportunistic disinflation' requiring years of high rates rather than quick cuts. He argues markets are delusional in expecting rapid policy reversals and sees structural headwinds for bonds including war spending and potential dollar weakness.
Summary
Julian Brigden, founder of MI2 Partners, presents a comprehensive macro outlook challenging prevailing market narratives. He argues that inflation has likely peaked but warns against expecting a quick return to 2% levels, drawing parallels to the late 1960s-1990s period of recurring inflation waves. Brigden explains the Fed's likely strategy of 'opportunistic disinflation' - keeping the economy under pressure for years rather than deliberately crushing it like Volcker did. He contrasts this with Greenspan's approach in the mid-1990s, which took four and a half years of restrictive policy to bring inflation down from 4.5% to 2%. He criticizes both bond and equity markets as 'delusional' for pricing in rapid Fed reversals, noting the incompatibility between expecting no recession (equity market view) and aggressive rate cuts (bond market pricing). On bonds, while tactically bullish in the near term due to slowing growth, he identifies structural bearish factors including fungibility issues with European and Japanese bonds, technical damage from breaking 40-year trend lines, and fiscal concerns from war-related spending. Regarding recession timing, Brigden expects it to begin in Q2-Q3 2023, though his stock market indicators surprisingly suggest the bottom may already be in place around 3,700-3,800 on the S&P 500. He discusses the emerging war cycle, arguing it will drive sustained inflationary pressures through defense spending by the US, Europe, and Japan. On currencies, while not expecting immediate dollar collapse, he warns of potential unwinding of the reflexive cycle that has supported dollar strength through US asset inflows. The interview also covers European risks despite recent energy market relief, emphasizing consumer weakness and potential ECB policy errors.
Key Insights
- Brigden argues the Fed will pursue 'opportunistic disinflation' requiring years of restrictive rates rather than deliberate recession-inducing policy like Volcker's approach
- He claims both bond and equity markets are 'delusional' - bonds pricing 400 basis point inflation collapse and stocks expecting no recession while also expecting rate cuts
- The author draws parallels between current period and late 1960s-1990s, predicting structural inflation with four waves where each low point remains higher than the previous cycle
- Brigden explains that under Greenspan's opportunistic disinflation, rates remained in a 75 basis point range for four and a half years to bring CPI down just 2 percentage points
- He argues hyper-financialization means US financial markets now drive the real economy rather than vice versa, with CEOs cutting jobs when stock prices fall
- The author identifies three structural headwinds for bonds: fungibility with European/Japanese yields, technical damage from breaking 40-year trend lines, and fiscal spending pressures
- Brigden warns that ECB and BOJ policy reversals could add 100 basis points to European yields and 75 basis points to US Treasuries
- He argues the war cycle will drive sustained inflation through defense spending across US, Europe and Japan, representing money redirected from private to public sector
- The author suggests the current period may mark the end of the 'Great Moderation' and return to 1960s-70s style stop-go economics with volatile boom-bust cycles
- Brigden explains how central banks could transition from volatility-dampening forces to volatility-amplifying ones through late and overly aggressive policy reactions
- He warns that US dollar strength depends on continued foreign funding of current account and budget deficits, creating an inherently unstable equilibrium
- The author argues China openly supporting Russia with lethal aid could force US corporations to exit China, creating massive unpriced risks for markets
Topics
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