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Quill Intelligence

LONG MACRO

Recession probability to rise into 2025’s second half as private demand underperforms. The tariff shock should generate greater risks for a downshift in business investment and a more challenging environment for consumer cyclicals vis-à-vis consumer non-branded noncyclicals.

Manic shifts in U.S. politics harken first a deflationary gully to cross followed by the threat of impeachment and ultimately, a fourth change in administrations in as many U.S. presidential elections, a first in sequential terms since the precipice of the U.S. Civil War. The subsequent pendulum swing will manifest as Universal Basic Income/Modern Monetary Theory, and with it, the secular rise in inflation being prematurely predicted today by those positioned to profit from being short Treasuries.

Saturday Intelligence Briefing — 8.8.26

For decades, political polling has failed the American electorate. In less than three months, the betting markets will be tested. As recently as July 1st, Kalshi placed odds of the GOP maintaining its control of the U.S. Senate at 60%; at the time of this writing, it’s fallen to 53%. Working wacky hours in Italy has honed my news intake; one’s prism is naturally narrower when the views are stunning. The Street gleaned the obvious takeaway from Bank of America’s (BofA) weekly Flow Show – stocks are at their most overvalued levels since 2021, when COVID stimulus was infusing the economy and the Federal Reserve was buying up everything in sight.

About that prism… What caught my eye was the lowliest word being keystroked by the leader of the free world – “economy.” The impetus to distract from the truth is even stronger than it was last year. Of this act of desperation, given the undeniable mania that defines markets, this is the advice that BofA’s Michael Hartnett offered: “We long gold to hedge a K-shape electorate delivering (an) ‘it’s the economy, stupid’ midterms verdict triggering a big down in yields/dollar/stocks into year-end.”

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TACTICAL

RATES:

Short-end and Belly best opportunities for total return. Rally keys off weaker macro. Challenged private demand, higher unemployment and lower core inflation raise Fed rate cut probabilities.

Long-end holds at elevated levels with de facto caps at 4.5% for the 10-year & 5% for the long bond with the term premium supported by fiscal malfeasance exacerbated by falling sovereign revenues and despite diminishing stimulus to the U.S. consumer.

Curve view – Bull steepener in 2025’s second half.

USD:

A sidelined Fed contrasting with most global central banks easing catalyzed a selloff in the greenback. A Fed forced to play catchup could easily thin the massively crowded trade, especially as global trade weakness impairs an open global economy vs. its closed U.S. counterpart.

CREDIT:

•  Underweight HY, overweight strong cash-flow IG

•  Lower-rated buckets at risk of dispersion with Fed Higher for Longer

•  Jobless claims deterioration makes a cautious Street rethink already-wider-spreads 2025 expectations, i.e., up default estimates as bankruptcy cycle speeds up and size

•  Fitch’s acknowledgement of cyclical consumer sector “deteriorating” fits this view

EQUITIES:

OW     Utilities
OW     Fossil Fuel Energy
OW     Senior Living

UW     Consumer Staples
UW     Consumer Discretionary
UW     Large & Midsize Banks

OTHER ASSETS:

•  USD view supports UW commodities & EM

•  Oil is a different story with geopolitical risk ramping (Israel v Iran)

•  Long MOVE to capitalize on runaway lending to Nondepository Financial Institutions triggering a credit event