Morning Notes — Early Signs of Rotation

Crowded positioning in Tech reflects a bias to own secular growth stocks following 12+ years of disinflation that resulted in sub-1% ten year Treasury yields.  Twelve years is a long time and investors have been trained to expect low inflation, low interest rates and low bond yields forever maybe. Most investors recognize the post-pandemic world is very different from the pre-pandemic world, but seem unwilling to take action.  Clearing away the day-to-day noise, we can see a post-pandemic world of above-trend demand, excessive savings and higher incomes into tight supply conditions that lead to increased capex and eventually higher real yields. A supply/demand imbalance is also evident within labor markets, which means greater bargaining power, higher wages and a more persistent reflationary environment.  The pre-pandemic world, was also post-2008/2009 GFC, which meant below-trend credit creation. Over the past year, global credit creation exceeded pre-pandemic levels by ~50%.  At a recent sell-side conference, the management teams from every US large cap bank in attendance cited a Q4 acceleration in Commercial & Industrial (C&I) loan growth.