Summary

Craig centred his talk on inflation predictions and the future of FED policy; our current position in the economic cycle and what this means for the next 1-2 years; and the long-term consequences of deteriorating relations between China and Western democracies.

By analysing 10-year maturity bonds, Craig predicts Corporate Credit and Equities to be bubbles that will unwind over the next decade, followed by private assets, and finally, residential real estate. Craig discussed how the gap between core inflation and 10-year bond yields will close with sustained rather than transitionary inflation. Although this inflation is cyclical, it is structural, and this will lead to more sustained and higher inflation over time.

Craig discussed 4 key factors that will feed inflationary data over the next 10 years. Firstly, regarding green energy, if a smooth transition does not occur from carbon energy to green energy, along with Craig’s predicted increase in carbon prices, there is potential for inflationary bottlenecks. Secondly, the increased US deficit is increasingly inflationary, and this will only continue under Biden. Thirdly, the Baby Boom generation that has been in the workforce for 40 years has acted as disinflationary, but as they retire, this disinflationary force will dissipate. Finally, new types of warfare between Western democracies and China (cyber, economic, intellectual and physical naval aggressions) could create geopolitical conflict that results in higher inflation rates as seen in the 1960s and 1970s.

Regarding the economic cycle we are currently experiencing, Craig described it as a “hotted up” cycle, that is only a 3-year cycle rather than the longer 11-year cycle that we have just experienced. As a result, Craig forecasts a severe global economic slowdown in Q3 2022 and 2023. Craig positions the market at the cusp of a return in a global leading inductor and PMI cycle, and hence cyclicals versus defensives will start to massively reserve. Furthermore, past cycles have indicated large-cap quality equities outperformed for 3-4 years when coming out of a recession (2004 → 2008; 2011 → 2015). Therefore, these equities should be the focus rather than small-cap tech and value equities. However, Craig argues, value over growth seems to be the correct position if rising inflation continues. Craig advised preparing equity portfolios for cycle rotations in the next 3-6 months.

As the West Democracies and China continue to increase tensions with sanctions and naval movements an escalation is likely according to Craig. This will result in gold remaining the best hedge, but also Chinese focused commodities such as rare earth and green environmental energy-producing metals if China decreases exports. Good commodity short calls in such times are commodities that China mostly import, such as iron ore and coal. Taking a longer-term view, and assuming China does supersede the US, Chinese bond yield and A-shares will dramatically outperform the US along with other Western democracies.

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