Exposure rates of the Dorval Asset Management Range – 16th July 2021

Hopes of a sunny summer have been dashed by confusion, which reigns this season for both the macroeconomy and the markets.

Tremendous confusion on supply and demand. Hindrances to growth are currently more on the supply side than demand. However, inadequate supply is not a result of shortages in production capacity, but rather disorganized production and distribution chains due to an abrupt and enormous pick-up in demand. The worst effects of bottlenecks now seem to be a thing of the past if we are to believe certain alternative indicators (cf. chart 1). US carmakers expect to be able to substantially hike production from July on the back of electronic component deliveries.

Tremendous confusion on reflation and inflation. All evidence seems to indicate that the surge in prices in the US in the spring was a fleeting event, although this can become problematic if it thwarts the Fed and the Treasury in efforts to establish reflation, as they can then be accused of courting trouble. Reflationary policy needs to be long-lasting if it is to lend credence to the aim of re-anchoring inflation on a higher trajectory: the example of Prime Minister Abe’s three arrow program in Japan running headlong into the issue of VAT hikes is a clear illustration of this risk. The turning point marked by the FOMC meeting in June somewhat dented the reflationary creed, while talks on the recovery plan in Congress are another pitfall. Politics and investor expectations do not necessarily share the same timeframe: September will shed more light on the situation.


Can the Fed be satisfied with the situation?

5-year inflation projection in 5 years


Tremendous confusion on the economy and the stock-market. The second derivative rationale is so powerful that investors are sent spiraling into bewilderment. Growth is set to stay on a robust path over the quarters ahead, although it is unlikely to be upgraded. Now that the cyclical/reflationary/value euphoria of the first quarter has corrected, what happens next? Doubt takes root and investor sentiment is somewhat shaken.


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