Here’s What Won’t Happen in 2022
a follow up from Mr Macro along w/few other links to sellside dart throwing excercise
I have always said that the way to know good ideas when you see them is to see ALL the ideas and become able to delineate the good from the bad.
It is with this in mind, the following is from Bloomberg’s Cam Crise as he follows up his grades from 2021 calls (HERE)
Here’s What Won’t Happen in 2022. Today’s Macro Man column and podcast unveil my list of non-predictions for 2022. Last year’s list had a coherent theme -- inflation -- but this year’s marks more of a transition phase for the economy, policy, and markets. Covering everything from eurodollars to the yuan, EM to the metaverse, the list offers up my take about what won’t happen next year.
And the full (‘ish)note, where #s 1 (EDZ2 pricing), #2 (EDZ4 pricing), #3 (2s10s) and #8 (inflation theme) are of increased interest…
Eight Things That Just Aren’t Gonna Happen Next Year
Today marks this column’s final edition of 2021, and with it a look forward to 2022. In truth, we should generally endeavor to focus on the future; after all, money is made in financial markets by anticipating what will happen, not by explaining the events of the past. It’s something of a tradition to engage in a formal exercise of prognostication as the calendar winds to a close, which for this column entails a series of non-predictions --forecasting things that will not happen. It seems 2022 is likely to mark something of a transition year for the global economy, policy, and public health; the following is my take on what it won’t look like.
Non-prediction 1: EDZ2 will NOT finish more than 51 ticks away from 99.00. This might seem like an obvious call, given current pricing (98.95) and the FOMC dot-plot projection (0.875% for the end of 2022.) You could argue that this contract should sell off another 7 ticks or so to fully price the Fed’s projection, but that’s it. Yet the straddle is currently priced at 51 ticks, representing an implied volatility that exceeds anything observed for the 4th eurodollar contract from 2012 through 2018. Yes, Covid provides plenty of uncertainty and the dot plot is a projection, not a guarantee. But it seems pretty darned likely that Libor will be somewhere between 0.49% and 1.51% by this time next year.
Non-prediction 2: EDZ4 will NOT end the year higher than 98.30. That price is current at the time of writing, and per some of my recent commentary represents an unusually high market conviction that the Fed will hike a few times and then stop. Yet the market almost always underestimates the full magnitude of a tightening cycle, and while both Covid and the Fed’s new framework provide something of a unique backdrop, so too does supply-constraint-driven inflation. It’s been a fairly constant refrain in this space that the market is too sanguine about the prospects for the magnitude of the cycle, so let’s crystallize that here.
Non-prediction 3: The U.S. 2s-10s curve will NOT end 2022 more than 20 bps away from the current one- year forward. For all the sturm und drang over U.S. fixed income this year, the curve has been remarkably static, in aggregate: It ended 2020 at 79 bps, and as I type it is currently 79 bps. Thanks to the tightening expected next year, the curve is a lot flatter in forward space; the current one-year forward is trading around 43 bps. While 2s-10s is substantially flatter than my model suggests it should be, when I plug in some reasonable policy and economic expectations for next year the framework suggests a flattening of 40 bps or so. That would put it pretty much bang on the forward, so I am going to assume it moves there.
Non-prediction 4: Metaverse stocks will NOT outperform clean energy stocks. Riding the wave of a long-term theme is one of the most satisfying aspects of investing, at least while it is working. Two of the more notable secular themes these days are the transition to green energy and the building out of the metaverse. Over the last five years, the correlation of monthly returns of indexes isolating these themes has been 0.62, and it was 0.4 in 2021. Yet while the Solactive Metaverse index is up 39% ytd at the time of writing, the S&P clean energy index is down 25%. It may be more hope than expectation, but I’ve got a hunch that mean reversion will kick in next year. At the very least I’d like to hope that investors allocate more capital to firms endeavoring to preserve the planet’s ecosystem than to those encouraging people to wear ridiculous goggles and waste time while the real world passes them by.
Non-prediction 5: The yuan will NOT end 2022 at or above current levels versus its CFETS basket (102.8). One of the more interesting aspects of this year has been the strength of the yuan against the dollar in the context of the dollar’s strength against everything else. This has pushed the Chinese currency to record highs against its CFETS reference basket, which was introduced a little more than six years ago. This has been a burden that China has been prepared to bear as producer price inflation has hit double digits, but recent policy shifts suggest that enough may be enough. After a broad 7.5% appreciation this year, the yuan should dip on a broad basis if and as inflation shows any sign of moderating.
Non-prediction 6: The average level of the VIX in 2022 will NOT be below this year’s average (19.7). Take a richly valued equity market, add monetary tightening, and what do you get? I actually tried to convince myself that VIX would fall next year, but the macro bear inside me just shook its head in disgust. Metrics like the real earnings yield suggest a bumpy ride ahead, and perhaps the onset of tightening will make that materialize. It’s notable that the VVIX (the volatility of the VIX) is at its 98th percentile reading since inception; when the VVIX has been elevated relative to the VIX in the past, historically the latter has tended to rise over the ensuing three months. Throw in what’s likely to be a messy midterm election season, and the guess here is that equity volatility will remain (even more) elevated.
Non-prediction 7: Emerging market stocks will NOT outperform Europe. Two of the regular menu items on year-ahead outlooks in recent years have been “EM to deliver” and “this is Europe’s year.” By and large, they have been wrong more often than not. Frankly, I am tired of expecting U.S. equity market hegemony to end and being wrong, so take that as a contrarian signal if you will. Of the two perennial bridesmaids, I prefer Europe next year, as it looks somewhat better placed to weather the onset of global monetary tightening.
Non-prediction 8: The inflation theme will NOT go away. It is certainly reasonable to think that we are at or past the peak rate of inflation for certain commodity prices; it’s almost impossible to contemplate another tenfold increase in natural gas prices like we’ve seen in Germany over the last year. That being said, the lagged nature of shelter inflation should keep core price measures in the U.S. elevated through much if not all of 2022, and right now the resolution of supply shortages remains more hope than reality. My entry in the recent MLIV survey for year-end headline CPI was 3.5%, and my guess is that a miss is more likely to be to the topside than the downside.
So there you have it: an environment of moderating but still elevated inflation in which the Fed presses ahead with policy normalization. This year’s non-predictions aren’t quite as thematically coherent as last year’s, which reflects its transitional nature as we move to whatever the new normal looks like. As best as I can make out this is what won’t happen next year. Happy holidays to all readers and best of luck in 2022.
Make of these whatever you will in as far as 2022 goes.
For somewhat more, see
BBG econ dept crystal ball HERE
DBs top 10 themes HERE and recently updated higher rates (10s are going to end 2022 @ 2.20 after hitting 2.25% in Q1 and 2.40% in Q2) call HERE
Guess WHO offers S&P 5,250 and Dow 40k