Risk Underpriced - Hot Inflation Pending

Macro Perspectives: Wed 6 Jan 2021

A democrat sweep in yesterday’s Georgia Senate race would likely lead to a multi-trillion dollar government spend on a clean energy plan, under a Biden presidency and an aligned Congress. A big government spend would add even more fuel to the asset price fire, putting "inflation risk" (and maybe hot inflation) in the crosshairs.

With that "hot inflation" scenario in play, commodities were up big, the dollar was down and rates are on the move up.

The 10-year yield will be the spot to watch in the first half of the year as the market begins to project this scenario where the Fed, for the first time in a long time, will be caught behind the curve on inflation.

Despite the move in gold and the follow through of this 2021 inflation theme, I suspect we can take very little information from the first two trading days of the year, at this point. That is, unless today's joint session of Congress produces no drama - every indication points to the opposite.

Yet, with a VIX at 25, the markets continue to underprice the risk of chaos surrounding the Electoral College count.

The likely scenario is for the session to play out beyond today (to follow objection procedures), with the potential that the six states that sent competing slates of delegates be asked to clarify which should be counted (which could open the door to a special session in those states and an investigation). Bottom line, it's unlikely to be a quick and tidy stamp for Biden. Markets won't like that, and we should see "risk off." Perhaps the market that has been giving us that signal the clearest, since election day: Bitcoin.