Macro and Flows Update: February 2023 - e14
Summary
TLDRThe video discusses the macroeconomic trends and market dynamics, highlighting the counter-trend rally expected around February 15th based on bearish sentiment and market positioning. It emphasizes the structural shift towards a demand-push economy and the impact of reduced liquidity due to higher interest rates. The speaker suggests that while the market may rally in the short term, driven by factors like V compression and poor positioning, a potential decline is on the horizon, with knowledge and sentiment playing crucial roles in market movements.
Takeaways
- 📈 The script discusses a counter trend rally that was anticipated in November and December, which materialized as predicted.
- 📅 The date February 15th is highlighted as a potential window of weakness in the market, based on historical patterns and sentiment analysis.
- 🚫 The traditional seasonal rallies like the 'Santa Claus rally' and 'January effect' were expected to be subdued due to the negative performance and liquidity issues experienced in the previous year.
- 🇨🇳 Mention is made of developments such as the opening in China and new stimulus measures as factors contributing to market movements.
- 🌡️ The script references a warmer-than-expected winter in Europe and geopolitical tensions between Russia and Ukraine as elements that have influenced market sentiment.
- 💹 There is a discussion about the transition from a supply-side economic model to a demand-push economy, which is expected to result in stronger GDP growth but reduced liquidity in the market.
- 🛑 The increasing interest rates and the potential for the Federal Reserve to reduce market liquidity are seen as risks that could affect the market negatively.
- 📊 The script suggests that the market may be more expensive at the current level compared to previous highs, due to changes in interest rates and discount rates.
- 🔄 The concept of a 'Goldilocks' scenario is mentioned, where the absence of a feared recession leads to improved market sentiment and potential for further rallies.
- 💭 There is a cautionary note about the dangers of being underpositioned in the market, especially given the potential for increased volatility and shifts in investor sentiment.
- 📈 The potential for a buying opportunity towards the end of February or early March is suggested, contingent on market conditions and the behavior of volatility.
Q & A
What was the main prediction discussed in the video script for November and December?
-The main prediction discussed in the video script for November and December was a counter trend rally.
Why did the speaker believe that late December and early January would not experience normal seasonality?
-The speaker believed that late December and early January would not experience normal seasonality due to the negative performance for the year and negative liquidity, particularly in private equity and venture capital, as well as other slow-moving investment vehicles.
What was the expected push in early January?
-The expected push in early January was around January 9th to 10th, which was anticipated to continue into February 15th.
Why is February 15th considered a window of potential weakness according to the speaker?
-February 15th is considered a window of potential weakness due to the counter trend movement based on overly bearish sentiment, opening in China, new stimulus from there, massive vault compression from the second half of the year, and geopolitical concerns like Russia-Ukraine tensions.
What economic conditions are driving the current market situation?
-The current market situation is driven by a demand push economy, which is similar to the conditions in the 1960s and 1970s, and is characterized by stronger GDP growth in real terms compared to supply-side economics. However, it also results in less liquidity in the market due to higher interest rates and better alternatives to equities, such as bonds at a 5% yield.
What does the speaker suggest about the market's rally and the fear of missing out (FOMO)?
-The speaker suggests that the market's rally is being driven by FOMO, as many investors who underperformed in the previous year are now being forced back into the market, fearing they might miss out on potential gains.
What is the speaker's view on the market's structural trend?
-The speaker believes that we are entering a period of secular reduction in liquidity driven by an increase in inflationary impulse, which suggests a structural bear market trend despite the recent rally.
What does the speaker mean by 'knowledge is all dampening'?
-By saying 'knowledge is all dampening,' the speaker means that the widespread awareness and discussion of a potential market decline, including predictions from various金融机构 and analysis platforms like GPT, can influence market behavior and potentially prevent a significant crash or delay the market's reaction to certain trends.
What is the significance of the February 15th date mentioned in the script?
-The significance of the February 15th date is that it was identified as a potential turning point for market weakness, based on various economic factors and market sentiment analysis.
What does the speaker suggest about the market's future movement?
-The speaker suggests that the market may continue to experience rallies and periods of weakness, and that investors should be cautious and prepared for potential declines, especially given the structural trends and the influence of knowledge and sentiment on market behavior.
What advice does the speaker give to investors regarding their approach to the market?
-The speaker advises investors to remain flexible, not be dogmatic, and to pivot quickly based on market conditions. They should look for opportunities, be aware of the structural trends, and manage their risk appropriately.
Outlines
📈 Market Analysis and Predictions
The speaker begins by welcoming viewers to the macro and flows update video, discussing the market's performance around mid-February. They recall their predictions from October, which forecasted a counter trend rally in November and December, and the absence of typical seasonality in late December and early January due to negative performance and liquidity issues. The speaker then highlights the anticipation of a market push into February 15th, which started around January 9th-10th. They emphasize that despite step-by-step progress, a window of potential weakness has opened on February 15th, attributed to the counter trend movement based on bearish sentiment and other factors such as China's opening and new stimulus, massive vault compression, and geopolitical concerns. The speaker also notes the healthy market consolidation and the underpositioning of many clients, which is driving the market rally. They discuss the fear of missing out (FOMO) and its impact on market allocation, and contrast the current situation with historical economic trends, highlighting the transition from a supply-side to a demand-push economy and its implications on liquidity and asset valuations.
💡 Understanding the Market's Structural Shift
The speaker delves deeper into the structural changes in the market, emphasizing the transition from a supply-side economic bubble to a demand-push economy, which is more akin to the 1960s and 1970s. They explain that while this shift results in stronger GDP growth, it also leads to reduced liquidity due to higher costs of money and more attractive alternatives to equities, such as bonds. The speaker discusses the implications of a 5% bond yield on investment strategies and the challenges faced by most strategies to match or exceed this yield. They also touch on the secular effects of these changes, driven by populism and the need to address inequality. The speaker then discusses the current market valuations, the irony that the market is more expensive now than at previous highs, and the potential for further rallies despite poor sentiment. They caution about the increasing likelihood of the Federal Reserve reducing market liquidity and increasing interest rates, which they believe will happen faster than expected. The speaker also highlights the dampening effect of knowledge on markets, as various entities, including Goldman Sachs and JP Morgan, have joined in predicting a mid-February market decline. They discuss the importance of being cautious and prepared for potential buying opportunities towards the end of February or early March.
🔄 Market Positioning and Strategy
The speaker discusses the current market positioning and the importance of being cautious and adaptive. They mention the recent market decline and the lack of significant volatility, which has reduced the chances of a major liquidation. The speaker suggests that if the market does not experience a larger decline and volatility remains well-supplied, it could signal a buying opportunity towards the end of February or early March. They also discuss the potential for a market rally into April or May, driven by short squeezes and forced investment from underinvested entities. The speaker emphasizes the unpredictability of market timing but suggests that the current counter-trend move within a structural bear market could last longer than expected. They advise viewers to be wary, especially given recent market involvement by Carl Icahn, and to be prepared for potential market shifts. The speaker concludes by reminding viewers of the importance of flexibility and opportunity seeking, and they clarify that the content of the video does not constitute investment advice or recommendations.
Mindmap
Keywords
💡Macro and flows update
💡Counter Trend Rally
💡Seasonality
💡Liquidity
💡Inflationary Impulse
💡Demand Push Economy
💡Volatility
💡V compression
💡FOMO
💡Sentiment
💡Market Crash
💡Opex
Highlights
The speaker has been discussing the market trends since October, with a focus on the counter trend rally expected in November and December.
November and December experienced a counter trend rally as predicted, defying the normal seasonality of the market.
The Santa Claus rally and January effect were expected to be duds due to the negative performance and liquidity issues.
A push into February 15th was anticipated from early January, which aligns with the actual market movement.
February 15th is considered a window of potential weakness due to the counter trend movement and overly bearish sentiment.
The opening in China and new stimulus measures, along with massive vault compression, contributed to the market's movement.
Europe's warmer than expected winter and geopolitical tensions between Russia and Ukraine have also influenced market sentiment.
Many investors, including clients, are underpositioned, leading to a fear of missing out (FOMO) and driving short-term rallies.
The market is experiencing a period of secular reduction and liquidity driven by an increase in inflationary impulse.
The current economic situation is more akin to a demand push economy, which historically has led to stronger GDP growth.
Liquidity in the market is decreasing due to higher interest rates and better alternatives to equities, such as bonds.
The speaker suggests that the current market rally is driven by poor positioning, underperformance, and investment chase.
Knowledge is dampening the market, as many experts, including Goldman Sachs and JP Morgan, are predicting a mid-February decline.
The speaker advises caution and vigilance, suggesting that the current rally might be part of a counter trend move within a structural bear market.
The potential for a market decline is expected to last longer than most anticipate, based on the speaker's 25 years of experience.
The speaker notes that the most likely scenario is a decline beginning in February, but the exact timing remains uncertain.
The importance of being adaptable and not dogmatic in market positioning is emphasized, as well as the need to look for opportunities.
Transcripts
hello and welcome back to another
episode of the macro and flows update
video uh here we are in
mid-February uh February 15th in fact a
day that you have probably heard me talk
about for some time uh starting in
October uh many here will remember uh
that we began here at Kai volatility to
call for a counter Trend rally in
November and December um and that's what
we got we were also very clear as we got
into November and then December in these
updates that late December would not
experience the normal seasonality nor
would early January that the Santa Claus
rally in the January effect would be
Duds uh because of the negative
performance for the year and the
negative liquidity um uh on private
Equity Venture Capital as well as other
slow moving um investment vehicles um
that's what we got um we then were very
clear that we should get a uh another
push uh into to February 15th starting
in early January kind of around that
January 9th to 10th uh time period um
and that's what we got as well so here
we have been moving along uh step by
step um but we've been very clear since
the very beginning that February 15th
represented an opening of a window of
potential
weakness um why is that uh partially
because of this counter Trend uh
movement that we saw coming based on
overly bearish sentiment um several
things uh you know along with uh opening
uh in in China and new stimulus coming
from there uh massive Vault compression
on the back half of from the back half
of the year in ear uh January um as
well um a a Europe coming out of a
winter uh that was warmer than expected
and uh a a wall of worry formed by kind
of Russia Ukraine ultimately that has
just kind of L along throughout that
period um we had healthy consolidation
along the way at the end of the day um
there are many people clients included
that I've had conversations with that
have been dramatically underp positioned
um and there is the more the market
rallies a a need uh to push into the
market uh and to be allocated anybody
who under uh you know overperformed
really bad outcomes last year looked
pretty good but now now if they were low
leverage and the Market's rallying back
uh there's a fear that that they might
miss out that fomo is building I'm
hearing it anecdotally um entities are
being forced back in uh that's what
ultimately drives these rallies in the
short
term but again our view and we've talked
about this many times over the last uh
several years has been that we are
entering a period of secular uh
reduction and liquidity driven by an
increase in inflationary impulse we are
in a demand push economy much like we've
spoken about from a macro perspective uh
we've seen um outperformance
economically right everybody's worried
about the recession and that recession
should cause a decline in the market
because I'll reduce earnings Etc the
reality is that's not what drives
markets we've had a below Trend uh
economic growth now for more than 20
years um yet markets have performed
spectacularly why is that as we've
spoken about massive liquidity
injections um and driving of a supply
side economic uh bubble um we're no
longer doing that we're we're operating
in a demand um economy that actually
much like the 60s and 70s and we've
spoken about this before drives a much
stronger economic GDP growth in real
terms uh than than Supply side economics
but what it does is it reduces liquidity
from the market um we have less
liquidity because the price of money is
higher uh broadly for all assets but
again maybe more importantly the
alternatives to equities are
significantly better at a 5% bond
yield um our strategies invest and and
stack return they do yield enhancement
by not only taking that new higher yield
at 5% right and returning our
performance on top of it um but very few
strategies can do that most have to take
away from equities to put into
bonds um ultimately um these effects um
are secular effects We Believe given the
populism and the growth of uh a need to
to reduce this inequality um that we'll
continue to
see um so in that world uh equities are
a dangerous place to be especially at
these valuations uh several people have
remarked that the the market at 4,800 at
the at the high was was actually much
cheaper than the market is now given
where interest rates were based on the
discount rate Alone um you know
ironically at 4150 here the market is
more expensive than the last top so that
doesn't mean we can't rally more it
doesn't mean that uh those that have
that are not pushed in can't be pushed
in more especially given how uh poor
sentiment has been but we're starting to
hear the word Goldilocks more and more
everybody is looking and saying whoa
there's not a recession we thought
there'd be a bad recession and that must
mean that stocks are actually going to
do better sentiment is improving uh a
bit um and again that economy um you
know with that hot Employment Number
very hot Employment Number a a a warmer
CPI than
expected um is giving room for
excitement for for uh for CEOs and
people in the real
economy but unfortunately that means
liquidity uh the FED at its core is
likely as we've said for some time now
to be pushed back in to um reduce
liquidity in the market uh to increase
interest rates um and we believe uh
that's likely to happen increasingly
faster than people
expect so counter Trend rally uh
reducing kind of poor positioning under
underperformance and investment Chase
particularly based on V compression have
driven this rally to
date but here we sit on a counter Trend
rally um in a window of weakness with
less structural uh demand for a short
period the problem here and and why we
believe it's going to be difficult to
crack this Market is
knowledge what do you mean knowledge Jem
what people are saying I've never heard
you talk about this
knowledge is V
dampening markets are fairly efficient
um people like ourselves are out there
talking about these things right we've
been talking about February 15th uh for
about 4 and a half months as a date uh
oddly uh Goldman Sachs came out about a
month and a half ago and started calling
for a mid-feb decline now uh JP Morgan
just two days ago Marco kovich is
calling for a similar decline everybody
has joined the bandwagon we recently
read something that chat GPT has scoured
the internet and when asked what the
most likely outcome for the next several
months is claimed a February 15th Market
crashes in the cards that should tell
you
something knowledge is all
dampening um that's part of why this
Market has pulled back and didn't get
the blowoff top we would have hoped to
get the market up vup final leg that is
all so important U during this final leg
to unpin
V the decline we've seen the last uh
several days which is not much is really
a digestion of uh maybe 3% off uh the
recent highs um has been lackluster at
best and the amount of V supply has
dramatically reduced the odds of of some
type of
liquidation um that doesn't mean we
won't decline but we're more likely to
see something
ton and if we begin to see uh a time
period here where that decline does not
turn into something bigger and Vol still
well supplied again a week week and a
half here during this window of non
strength that we talk about um it could
very well uh come the end of this month
February 27th 28th or so um begin to
look like another buying opportunity
that said very important right now to
watch carefully
cautiously um doesn't mean you need to
be long V in the tail yet um and look
for an opportunity for VA to break it
could still happen some of you that
follow me on social media um may have
heard me reference Carl icon coming back
into the market and trying to buy some
downside puts as well he bought some
February 4050 puts about
24,000 of them um not successfully here
so far get a couple days left he also
recently added uh 23,000 of the March
3950 puts in the S&P um all of these es
puts um have dramatic convexity and
given how cheap uh V and skew has become
represent a significant opportunity if
this Market is to break and could be an
accelerant to that Vol move along with
uh increased vix call trading if we were
to get a decline that said as many of
you know uh given a big March Opex out
there with lots of open interest if we
can get past this week and half
window that window of potential weakness
could dramatically turn to stronger and
stronger vaa and charm flows that could
really fuel another leg higher another
squeeze of those shorts forcing even
more investors who are underinvested
back into the market so this real
potential right tail as we move forward
into into mid-march um that that could
really Propel the market and squeeze
shorts into a market up volup regime U
maybe even into April um May we've said
before the most likely scenario is that
this lasts longer than most could expect
that's from my 25 years in this market
something that you know people who are
veterans learn that things always take a
bit longer than you
expect um and and that's actually uh
what we've been saying all along that
February is the beginning of a potential
decline if it doesn't happen you need to
to be very watchful this is a counter
trun move within a structural secular uh
bare Market still but that's at the very
end going to feel exactly uncomfortable
to everybody that that it maybe it's not
and that moment when people become more
bullish get pushed back in um is exactly
the time to get bearish so windows open
um we believe it is here still in the
next six months um when it will happen
is
still anybody's guess but in these
windows of weaknesses in particular
particularly in the in the serial months
before quarterly like this February
right before the March May right before
the June tend to be periods where
they're much more likely based on
positioning um in the market so let's
see what happens here um definitely a
time to be weary especially given icons
involvement but knowledge is all
dampening time is not a bears friend if
uh you get situations like this where
the market front runs it where all is
well supplied where the market cannot
decline after a period ultimately that
time will lead us to a new periods of v
and chart flows particularly as we enter
our quarterly Opex and that's important
to note um and and could really again
squeeze shorts for another leg higher if
it doesn't happen here soon so um as
always and as you can tell through those
comments it's important to always
remember to be water always be water do
not be looking to be dogmatic um overly
bearish overly bullish uh pivot quickly
uh and look for opportunities that's
what we do here at Kai volatility um
wish you all the best until next time
thanks for tuning
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