Macro and Flows Update: September 2022 - e09
Summary
TLDRThe video discusses ongoing macroeconomic trends, emphasizing the challenge faced by the Federal Reserve due to accelerating core inflation. It suggests that the Fed may need to increase rates significantly, potentially nearing 7%, leading to bearish market conditions. The script also highlights the impact of reduced asset demand due to higher costs of money, margin compression, and the shift of funds to bonds. It advises viewers to continue selling rallies and to be cautious of market positioning and macro flows, while also noting potential opportunities in the medium to long term, especially as the market navigates through a period of fiscal and political changes.
Takeaways
- 📈 The CPI print indicates ongoing strong and accelerating core inflation, complicating the Federal Reserve's policy decisions.
- 💹 As interest rates rise, expect multiple contractions, reduced demand for assets, and margin compression due to the reverse Tina effect.
- 💲 The shift of funds to bonds, increased volatility, and risk premiums are signs of a changing economic landscape without a Fed put option.
- 📊 Conservative estimates suggest that long-term rates may reach 4.3-4%, but the actual Fed target could be closer to 7%, indicating a more aggressive stance.
- 🔻 The advice is to continue selling rallies as the structural negative effects and macro flows persist, despite short-term countertrend rallies.
- 🌐 Strength in the US dollar is expected to continue, with margin compression from international earnings filtering through the upcoming earnings season.
- 📅 The Fed's tapering has reduced demand for assets by billions daily, which is a significant figure to consider for market dynamics.
- 🚫 The buyback blackout period and the five-week expiration cycle could lead to reduced market support and increased fragility in the short term.
- 📉 The Fed meeting approaching is unlikely to show a pivot towards ease; a hawkish stance is anticipated, emphasizing the importance of not fighting against the central bank's direction.
- 🎯 The bull case lies in short interest and record high V (volatility) supplies, which could lead to short-term pressure but also opportunities for market corrections.
Q & A
What is the current situation regarding core inflation as mentioned in the script?
-The script indicates that core inflation is not only strong but continues to accelerate, making the Federal Reserve's job more challenging.
What does the script imply about the Federal Reserve's position and actions?
-The script suggests that the Federal Reserve is in a difficult situation, often referred to as 'in a box'. As the cost of money goes up, it leads to multiple contractions, less demand for assets, and margin compression. The Fed is expected to raise rates significantly, potentially close to 7%, to combat the negative real rates currently in place.
How does the script describe the impact of rising interest rates on various financial aspects?
-Rising interest rates are expected to lead to reduced demand for assets, margin compression, elevated volatility and risk premia due to the absence of a 'put' at the Fed, and an increase in the discount rate which results in a decline in business investment.
What is the significance of the term 'reverse Tina effect' in the context of the script?
-The 'reverse Tina effect' refers to a situation where the cost of money goes up, leading to money flowing into bonds as an alternative investment. This term is used to describe one of the consequences of the rising interest rates.
What does the script suggest about the future of the 10-year yields?
-The script suggests that the 10-year yields are expected to go higher due to the Federal Reserve's likely aggressive stance and the ongoing issue with CPI core inflation.
How does the script advise investors to position themselves in the current market conditions?
-The script advises investors to continue selling the rallies, as the long-term trend is bearish. It also warns against waiting for a market pivot and a return to all-time highs, suggesting that this is a secular move that is just beginning.
What is the expected impact of the FED's change in tapering on the market?
-The FED has reduced its tapering from 47.5 billion to 95 billion, which means there is now about 4 and a half billion less demand for assets per day. This significant number is something investors should be mindful of as it could impact the market dynamics.
What does the script indicate about the upcoming earnings season?
-The script indicates that the upcoming earnings season will be more relevant and important than previous ones. It suggests that the margin compression from international earnings should begin to filter through, making this earnings season more impactful on the market.
What is the potential effect of international dollar-denominated debt on the market?
-The script suggests that there might be a lag in the effect of international dollar-denominated debt on the market. However, as this impact starts to be felt, it could potentially lead to increased volatility and risk in the market.
What does the script imply about the short-term market dynamics?
-The script implies that the short-term market dynamics are influenced by factors such as the FED meeting, the entering of a blackout period for buybacks, and the beginning of a five-week expiration cycle. These factors could lead to a fragile moment in the market, especially in the next two weeks.
What is the script's stance on the potential for a market downturn?
-The script maintains a bearish stance, suggesting that a market downturn is likely and recommending strategies such as selling rallies and looking for counter-trend opportunities. It advises against waiting for a market pivot and emphasizes the importance of being cautious in the current macro environment.
What does the script indicate about the potential for long-term investments?
-The script suggests that long-term investments, particularly in the context of options and structured products, may face challenges due to reduced demand and increased supply. It advises investors to be cautious and to consider the potential for a market downturn when making long-term investment decisions.
Outlines
📈 Economic Trends and Monetary Policy Challenges
This paragraph discusses the persistent long-term trends, particularly focusing on the recent CPI print indicating sticky core inflation that continues to strengthen. It emphasizes the challenges faced by the Federal Reserve in managing the economy as money costs rise, leading to asset demand contraction, margin compression, and a shift towards bonds due to the reverse Tina effect. The speaker suggests that the Fed is likely to increase rates significantly, possibly close to 7%, and advises selling rallies due to the public's awareness of the situation. The tug-of-war between macroeconomic flows and market positioning is highlighted as a recurring theme throughout the year.
📊 Market Dynamics and Upcoming Fiscal Events
The second paragraph delves into the market dynamics, especially the impact of the expiration cycle on buyback and charm flows, signaling a potentially fragile period for the market. It mentions the upcoming Fed meeting and the likelihood of a hawkish stance due to political considerations. The paragraph also discusses the Fed's actions in selling calls to achieve lower volatility and asset prices, and advises against waiting for a market pivot. It further explores the potential for short interest and the supply of V (presumably a financial instrument or index), predicting continued market pressure and a difficult environment for long positions. The speaker also notes the potential for long-all to perform well in the coming months, especially as election season approaches.
🌐 Global Economic Outlook and Investment Strategies
The final paragraph provides an overview of the global economic outlook, emphasizing the likelihood of continued inflation despite potential recessionary signals. It suggests that any reduction in inflation will be minimal and based on the short end of the curve. The speaker advises to continue selling rallies and looking for counter-trend opportunities, without the need for significant tail hedging at this point. The paragraph concludes by acknowledging the challenging market conditions but encourages viewers to seek opportunities in the current environment. It also includes a disclaimer that the content does not constitute investment advice and that viewers should consult with their advisors for personalized guidance.
Mindmap
Keywords
💡CPI
💡Fed
💡Sticky Inflation
💡Margin Compression
💡Risk Premia
💡Discount Rate
💡Real Rates
💡Tapering
💡Buybacks
💡Structured Products
💡Seasonality
Highlights
Long-term trends continue with CPI print showing sticky core inflation accelerating, complicating the Federal Reserve's task.
The Fed is facing a challenging situation as the cost of money increases, leading to multiple contractions and less demand for assets.
Margin compression is a significant topic of discussion due to its impact on the reverse Tina effect and money flowing to bonds.
Volatility and risk premia remain elevated as there's no longer a 'put' at the Fed, and the strike has gone down.
The discount rate is rising, leading to a decline in business investment, which is bearish for the market.
Long-term rates are conservative, and the Fed is expected to go much higher, possibly close to 7%.
The current situation calls for selling the rallies due to the public knowledge of the macroeconomic situation and short positioning.
The tug-of-war between structural negative effects and positioning is expected to continue in the medium term.
Dollar strength is anticipated to continue, with margin compression from international earnings becoming more relevant.
The upcoming earnings season is expected to be more impactful than previous ones, with attention on international earnings.
Issues related to international dollar-denominated debt and potential tail risk are expected to build up in the market.
The Fed has reduced tapering, leading to less demand for assets, which is a significant number to be mindful of.
The market is entering a fragile period with a buyout blackout period for buybacks and a five-week expiration cycle.
The upcoming Fed meeting is anticipated to result in a hawkish stance due to political considerations.
The Fed is selling calls, aiming for low volatility and lower asset prices, which is a key point to remember when trading.
Short interest is at record highs, and supply and demand dynamics are expected to continue putting pressure on the market.
Long-all may become a better trade in the coming months as the election season and Q1 period present potential opportunities.
Seasonality is weak at the moment but is expected to improve slightly in about a month, providing more support and a positive turn.
Transcripts
hello and welcome back to our September
macro and flows
update the long-term trends that we've
spoken about throughout these updates
continue to be in place as witnessed by
the CPI print this month sticky core
inflation continues to not only be
strong but continues to
accelerate uh making the fed's job
harder uh we talked about this in our
quarterly uh update um about uh the fed
and the sticky situation that they're in
the fed is in a box we've been talking
about this for some time as the cost of
money goes up uh you get multiple
contraction less demand for assets um
margin compression which we talked quite
a bit about the reverse Tina effect so
money starts flowing to bonds there's
now there is an alternative now um
volatility uh and risk Premia uh stays
elevated because there's no longer a put
um at the Fed
or at least the strike has gone down um
and of course the discount rate goes up
so business investment declines as well
all of these things obviously are
bearish we've talked uh about this quite
a bit the important part to understand
is that four three and a half 4% uh
long-term
rates um are actually conservative um
now uh again we talked about this in the
quarterly uh newsletter if you haven't
listen to it please or read it please go
read it uh but what we talk about is is
that burns raise rates 10 a half per. um
William mcchesney Martin raised them 7 a
half per. um and both of them uh barely
made real rates positive or or kept them
slightly negative but we are now at
incredibly negative real rates um the
FED has a ton of work to do it's our
view that fed will actually go much
higher probably close to 7% at the end
so expect these 10year uh yields to go
higher um expect uh a significant uh
aggressive fed and CPI core to continue
to clim all of that means longterm you
need to keep selling the rallies that
said we shouldn't continue to get these
counter trained rallies why because this
is public knowledge at this point
position positioning is very short right
um it is too easy to continue to sell uh
this uh you know down to to lows at this
point so there's a bit of a tug-of-war
between these structural negative
effects the macro flows that we're
seeing and then the positioning and this
tug-of war is what we've seen all year
that should
continue in the medium term the dollar
strength
continues um you know margin compression
from International earnings should be
beginning to filter through uh you know
the earning season will be coming up
here soon when it does we expect this to
be a more relevant uh you know uh an
important earnings season than we've
seen in a while so expect there to be
more attention on it this time around um
and it for to actually have an effect um
on on the underlying
Market um we would also expect more
medium to longterm starting to see issu
isues which you know there's a bit of a
lag here to uh International uh dollar
denominated debt um and potentially tail
starting to build in that uh
venue um importantly September 1 uh
September 1st uh we the FED has gone
from 47.5 billion of tapering to 95
that's about now 4 and5 billion Less in
demand for assets a day so you know that
is a signif ific number now up from half
of that um in the months prior so um you
know that's something to be very mindful
of um in the short term here you have
that effect as well as the fact that
we're entering a buyout uh a blackout
period for BuyBacks that is um that is
also huge right by BuyBacks have been at
record highs that uh you know that flow
has been something that has been
consistently supporting the market when
we get into these blackout periods um
that reduces is demand add to all of
that uh we are now entering a five week
expiration cycle I've talked about this
before when these happen they once every
three months or so when they happen uh
especially at the beginning of that that
five we cycle significantly reduce vaa
and charm flows there's going to be
significant less buyback of decay of the
options which sit at the October monthly
expiration and the Structured Products
that primarily sit at that expiration
so less demand from vonach charm more
Supply uh from QT coming off the table
or I guess less
demand um uh less buyback um so a really
kind of a fragile moment here uh the
next two weeks in particular represent
uh you know potentially dangerous period
the FED meeting is also incoming here
that is uh this coming Wednesday um you
know unlikely to see a a Fed that is um
especially going into this election
season given the politics involved uh
very likely to see a dobish Fed likely
to see a hawkish Fed very um very
strongly kind of ratcheting up uh what
they need to do the FED is selling calls
we've said this before they're not
buying plates they're selling calls they
want low volatility but they want asset
prices lower they want deleveraging in
the market and again don't fight the FED
there will be counter trun rallies but
do not sit here waiting for a pivot and
a return to alltime highs this is a
secular move that is really just
beginning so CBI is hot F fed's
credibility is probably the most
important thing especially going a
political cycle so the macro is uh you
know there's a macro overhang um you
know these are all things that you need
to be cautious of so what what's a bull
case you know what should we be careful
of again positioning short interest
record highs also V is dramatically
overs supplied we just left a quarterly
expiration where there was lots of short
interest from
dealers and behind that they've been
able to buy and own B um at a discount
so there is VA well supplied on top of
that we have an incoming JP Morgan
hedged Equity VA put Sprint collar being
sold that'll be sold at the end of the
quarter here D quarterly um V really
coming into the picture that's important
because D quartly at end of the year V
generally is very highly demanded when
you get a lot of V Supply in that area
you're actually begin to see uh people
who are short getting back the Vall that
they've been short and that has an over
exaggerated effect on V so v We Believe
will continue to be well supplied um but
there we we believe there will be short
um you know pressure on the market
throughout this period so more as we've
called for Market down VA down more of
what we've seen this should continue We
Believe until the end of the year to
really make longv a um a you know short
the market a good trade but longall
broadly a difficult trade the more that
this happens the more we're going to
begin to see liquidation out of all
trade out of all Investments puts will
be less demanded we believe we are
already in the eighth or ninth inning
now of um and we called about we called
this in late June actually um of of the
um uh you know the longall
underperforming trade so we we believe
there's a a window that is opening now
for longall to perform probably starting
in about a month or two so as we get
past you know into November December
election season it get starts to get
interesting
uh and very much so even the q1 period
January through uh March we believe is
is really a window um of a potential
tail opening um so we're getting there
we believe we're we're in the last
Innings maybe another quarter here but
we called in late June 3 to nine months
out uh about and we're almost to that
three-month Mark which I think is
important um to note so those are those
are the kind of the bullish supportive
things that are happening so we don't
expect big fireworks yet but something
out there on the horizon and something
to be thinking about and planning for
with your your
trades um last of all um you know it's
important to note that that seasonality
here is still quite weak as well people
talk a lot about that but that's
probably for about another month um and
then and then we'll we'll probably see a
little bit more support and some
positive um turn there um but again
longterm the trend is clear the macro
reasons for it have been reinforced of
anything throughout our period it's what
we've been calling for we begin to we
continue to see in the data even if we
do get a recession like we saw from
FedEx uh calling for for that we believe
the amount of inflation reduction that
we'll see will be based on the short end
the curve and if anything they response
to that which is likely to be more
fiscal in this political season will
only make that 10-year longer term um
inflation Outlook even worse so continue
to sell the rallies look for counter
Trend opportunities no need to sell it
here no need to try and Hedge for a big
tail yet but that that is on the
horizon as always thank you for tuning
in uh and and be water there's lots of
opportunities out there even in this
difficult Market thanks for tuning
in
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