A Different View on Rates

VT Tyndall North American Fund

A Different View on Rates

There aren’t many funds out there that have deflation as their base case for the first half of 2022, but that is our view and that is how we are positioned. As the consensus roars about inflation and the spectre of four or more rates hikes, we take a different view based on the rate of change of the underlying data. In fact, our base case for rates, is one hike then cuts. The reason is that the Federal Reserve is so late in raising rates that it’s going to be raising them as the economy slows. The opportunity to raise rates was in 2021 as the economy was growing quickly, not in 2022 as it now starts to crest and decelerate. The key reason that the economy will slow is the “un-compable comps” that we face in Q2. The chart below shows the huge spike of 12.23% GDP growth year on year that happened in Q2 of 2021. We will most likely never see a number that large ever again and it’s a mathematical certainty that growth slows in 2022, compared to 2021.


GDP growth was so high in Q2 of 2021 because we were comparing against the Covid breakout of 2020 plus most of the Federal bailout money was distributed in Q2 of 2021 as can be seen below:


As most of the extraordinary aid programs have now been stopped there is also a fiscal drag effect. This number is estimated to be around $1.3tr ie: $1.3tr of less government expenditure vs 2021.

So, our view is that the market won’t like a slowing economy and a tightening Fed and this is part of the reason that growth stocks have sold off so aggressively so far in 2022. The Nasdaq is down 16.2% since its high in late November. Small Caps too have not been spared with the Russell 2000 -19% from its high in November.

This slowing growth environment lends itself much more to interest rates falling as bonds begin to reflect the new reality rather than rates rising even though the Fed is raising rates. We have discussed inflation quite a bit over the last year, but it too looks like it is peaking, despite the many bullish super cycle commodity calls being bandied around the Wall Street research firms.

This outlook has the Fund in defensive mode, and we have reduced our Tech and Consumer Discretionary exposures and increased Healthcare and Staples and Cash to navigate what could be quite tricky markets over the next few months.

27th January 2022
Read time : 3  mins

This content is intended for professional clients only.

Data source: Hedgeye Risk Management LLC
Not for retail distribution – this document is intended for professional clients only

WARNING: All information about the VT Tyndall North American Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not