JP Smith of the IRF is joined by Patrick Perret-Green, the Founder of PPG Macro.
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In this podcast Patrick argues that the impact of the problems in the banking sector is likely to be highly disinflationary as the contraction in credit creation outweighs the creation of money by the US Fed. Whilst the stock of money supply remains extremely high, the flow is contracting at a rate unseen in the lifetime of most market participants.
Moreover, the expectation that high inflation is here to stay has become consensus, partly on the back of aging demographics pushing up consumption relative to savings, a narrative that Patrick does not buy into given Japan's experience over the past thirty years. Given the lags built into the inflation indices, especially with regard to shelter and the prospects for a marked weakening in the labour market as the global economy slows, investors will begin to focus on the secular disinflationary forces.
Outside the US, Patrick is especially concerned about China where the capital-intensive growth model has run out of steam and the money created by the PBOC will be used to prop up the property market and especially the highly indebted local government financing vehicles.
Given this backdrop, Patrick advocates a cautious and pragmatic approach to asset allocation favouring longer dated sovereign credit and equities that offer a defensive earnings profile and sustainable yield. Because of his pessimistic outlook for economic growth, he would underweight cyclical sectors, most commodities and emerging markets, the latter being further penalised by the likelihood of a stronger dollar as part of the global flight to perceived safer havens. Property and private equity are also very vulnerable to the process of price discovery and retrenchment by the banking sector.
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