Ecoinometrics - The timeline

Reviewing the constraints that are shaping the macro environment.

Not everyone is on the same page regarding what comes next. 

For some people risk assets and crypto have bottomed. For others the real correction hasn't even started yet.

For some people the US economy will remain strong. For others a deep recession is inevitable.

For some people inflation is finally getting under control. For others we are only in the first inning of a secular inflation movement.

The reason for that isn't that one camp is totally delusional and the other has prophetic abilities. People are split because the data itself is split. There are early signs of many potential futures and nothing is set in stone.

However if you step back and look at the big picture it seems that one timeline is more probable than the others. Let’s try to articulate why.

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The timeline

Everything is possible. That’s true but with a caveat. Everything is possible, but some things are more probable than others. 

To help highlight what is probable in the space of what's possible it is best to think in terms of constraints. 

What are the constraints on the global economy? What are the constraints on the central banks? What are the constraints on the financial markets?

Only after listing the constraints can we try to guess how they will shape the future macro environment.

So here we go:

• Constraint 1 - Inflation is a burden on the economy.

• Constraint 2 - The higher the risk free rate the weaker the economic activity.

• Constraint 3 - The higher the risk free rate the more likely some financial market will cease to function smoothly.

• Constraint 4 - Unemployment is as big a threat to the economy as inflation.

• Constraint 5 - The cost of energy is a wild card no-one has real control over.

What kind of probable future do you get when you put all these constraints together?