Macro and Flows Update: September 2022 - e09

Summary

The 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.