Macro and Flows Update: November 2022 - e11

Summary

The video discusses the recent market rally driven by event fall and seasonality, highlighting the importance of understanding market microstructure and structural underpinnings. It emphasizes the potential risks associated with low volatility and skew, suggesting that the current market optimism could be leading to a 'sell the news' scenario. The speaker advises viewers to be cautious, noting that despite positive short-term trends, structural inflation and macroeconomic challenges may persist, recommending a strategic approach to investing in assets like energy and commodities for the long term.

Takeaways

• 📉 Event Falls and their impact on market rallies, as seen with past political events and the recent CPI report, show that positive flows can occur regardless of the actual outcome.
• 📈 The market experienced a significant rally due to event V compression, which has since been decimated, but lower CPI figures contributed to the positive sentiment.
• 🎉 Seasonality plays a crucial role in market behavior, especially during the November to December period, where holiday-induced shortened trading days and lower volumes can accelerate structural flows.
• 🚫 The skew is currently at the zero percentile in the S&P, indicating a lack of hedging and potential vulnerability to shocks, unlike earlier in the year when skew was high and the market was well-cushioned.
• 💸 The potential energy for volatility to increase is significant given the current low skew and implied volatility levels, especially in a higher volatility regime.
• 🔄 Market participants have shifted from a hedged position earlier in the year to a less protected stance now, increasing crowding and the potential for a more significant downturn if issues arise.
• 🌐 Macro landscape suggests a potentially treacherous future despite recent positive news, with factors like dollar weakness and China's reopening potentially supporting structural inflation.
• 📊 Inflation expectations remain sticky, and despite some optimism around CPI declines, the structural factors contributing to inflation are likely to persist and may worsen.
• 🛒 The advice for investors is to be mindful of the potential risks and consider strategic hedging, especially given the potential for increased volatility and market shocks.
• 📈 Despite short-term optimism, the medium to long-term outlook suggests a need for caution, as structural issues and potential sell-the-news events could lead to market downturns.

Q & A

What is the main theme of the November episode of the Macro and Flows update?

The main theme of the November episode is the discussion of event falls, market rallies, and the impact of seasonality on market behavior, particularly in the context of holidays and the end of the year.

What does the term 'event fall' refer to in the context of the script?

In the context of the script, 'event fall' refers to the phenomenon where the worst-case scenarios expected by the markets are priced too high, leading to a market rally once the event gets compressed and the outcome becomes irrelevant.

How does the script explain the role of seasonality in market behavior?

The script explains that seasonality is not a magical construct but has real structural underpinnings related to market microstructure. It mentions that during the November to December period, the market experiences shortened time due to holidays, leading to lower volume and the potential for positive flows driving market behavior.

What is the significance of the skew being at the zero percentile in the S&P?

The skew being at the zero percentile in the S&P indicates that implied volatility skew is low, which generally points to entities not buying that skew and more sellers. This situation is considered risky as it means the market is not well-h hedged and a shock could lead to significant market movement.

What does the script suggest about the relationship between low skew and market behavior?

The script suggests that low skew is akin to having gasoline on the floor, indicating a high potential for a market shock to accelerate and cause significant changes. It also implies that when skew is low, market participants are not hedged, making the market more vulnerable to downturns.

How does the script discuss the potential impact of the US-China meeting on the market?

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What does the script suggest about the structural move in inflation?

The script suggests that there is a secular move in inflation driven by factors such as demographics, populism, and monetary policy cycles. Despite short-term fluctuations and potential declines in CPI, the structural inflation is expected to remain sticky and continue to increase in the long term.

What are the implications of a low implied volatility environment according to the script?

In a low implied volatility environment, the script suggests that there is significant potential energy for volatility to increase, especially in situations where markets become unpinned. This environment is likened to buying something very low, with the potential for substantial gains if markets move higher.

How does the script describe the impact of the Fed's actions on inflation and the market?

The script describes that despite the Fed's actions to raise rates and strengthen the dollar, significant inflation has occurred. It suggests that the structural factors supporting inflation are likely to continue and even get worse, leading to a sticky inflation environment in the long term.

What advice does the script give regarding investment strategy in the context of the current market conditions?

The script advises investors to be mindful of the potential risks and to consider hedging strategies, especially given the low skew and the potential for market shocks. It also suggests that investors should continue to add to their positions in energy and commodities on dips, as these are seen as secular moves that will outperform in the long term.

What is the script's outlook on equities and commodities in the next decade?

The script's outlook is that equities and commodities will face a challenging decade, with a focus on structural inflation and the impact of factors such as demographics and resource scarcity. It suggests that investors should approach equities with caution and consider commodities as a strong long-term investment.

Outlines

00:00

📈 Market Rally and Event Fall

The paragraph discusses the recent market rally following the event fall, where the market's worst-case scenarios, as expected by the markets, did not materialize into significant negative outcomes. It highlights the concept of VANNA and charm effects, which are positive flows that occur when an event risk gets compressed, leading to a rally regardless of the actual outcome. The speaker mentions that despite a lower CPI, the market rally was driven by the event V compression. The paragraph also touches on the importance of seasonality in market movements, particularly during the November to December period, and how holiday seasonality can impact trading volumes and market microstructure.

05:00

📉 Skew and Market Protection

This paragraph delves into the concept of skew in the market and its implications for investors. It explains that low skew generally indicates a lack of demand for protective measures, such as options, which can lead to an increased risk of market downturns. The speaker contrasts the current market situation with earlier in the year when skew was high, and markets were well-hedged. The paragraph also discusses the potential risks associated with low skew, comparing the market to a room filled with gasoline, where a shock could lead to a significant reaction. The speaker advises investors to consider hedges and protection strategies, especially given the current low levels of skew and the potential for market instability.

10:01

🌐 Macro Landscape and Inflation

The paragraph focuses on the broader macroeconomic landscape, particularly the issue of inflation. It discusses recent positive news, such as declining CPI and potential improvements in US-China relations, which have contributed to market optimism. However, the speaker warns that despite these short-term positives, structural factors that support inflation remain in place. The paragraph highlights the reversal of factors that previously helped contain inflation, such as dollar strength and government spending, and suggests that inflation may remain stubbornly high in the long term. The speaker also notes the potential for a 'buy the rumor, sell the news' scenario in the first quarter of the year, when the Fed is expected to pause its rate hikes.

15:02

🔄 Market Exposure and Hedging Strategies

This paragraph examines the changes in market exposure and hedging strategies over the past year. It contrasts the situation earlier in the year, where investors had significant hedges in place, with the current scenario where hedges have been reduced, leading to a more crowded risk profile. The speaker discusses the implications of these changes for market stability and the potential for increased market volatility. The paragraph also touches on the macro landscape, including the potential for increased demand from China and the impact of geopolitical tensions and resource scarcity on commodity prices. The speaker emphasizes the importance of being mindful of these factors when considering investment strategies and hedging approaches.

20:04

📊 Inflation and Interest Rates

The paragraph provides a detailed analysis of the relationship between inflation and interest rates. It outlines how higher interest rates can lead to reduced demand for assets, as money becomes less available and the cost of borrowing increases. The speaker discusses the 'reverse Tina effect,' where higher bond yields lead to less investment in risk assets. The paragraph also explores the impact of higher interest rates on market volatility, risk premiums, and investment margins. It highlights the 'discount rate effect,' where higher interest rates make future cash flows less valuable in present terms, leading to compressed multiples in the equity market. The speaker concludes by suggesting that the coming decade will be characterized by a structural move in inflation, with periods of cyclical downturns, and advises investors to consider long-term strategies for adding to positions in energy and commodities on market dips.

25:05

📝 Legal and Investment Disclaimer

The final paragraph serves as a legal and investment disclaimer, emphasizing that the content of the video does not constitute an offer to sell or a solicitation of an offer to buy any security or financial product or service. It clarifies that the video's content should not be interpreted as investment advice and that viewers are responsible for determining the suitability of any investment strategy based on their personal circumstances. The speaker advises viewers to consult with business, legal, or tax advisors for guidance on their specific situations.

Keywords

💡Event Falls

Event Falls refer to the phenomenon in financial markets where the price of a security moves in the opposite direction of what was expected following an event with significant market impact. In the context of the video, the speaker discusses how the market rallied despite the occurrence of worst-case scenarios, such as the 2020 contested election and the Brexit vote, due to the compression of event risks.

💡CPI

CPI stands for Consumer Price Index, which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. In the video, the speaker discusses the expectations around CPI and how a lower CPI reading led to a positive market reaction.

💡FED Meeting

The FED, or Federal Reserve, is the central banking system of the United States, and its meetings are closely watched by financial markets for clues about future monetary policy decisions. In the video, the speaker refers to the FED meeting as one of the events that market participants were closely monitoring for potential impacts on financial markets.

💡Seasonality

Seasonality refers to the pattern of behavior in financial markets that tends to repeat at regular intervals over the course of a year, often related to holidays or other predictable events. In the video, the speaker discusses how seasonality affects market behavior, particularly during the November to December period and how it can lead to changes in trading volume and market dynamics.

💡Vana and Charm

Vana and Charm are terms used in the video to describe the positive flows and effects that occur in financial markets under certain conditions, such as event fall compression. These terms seem to be metaphorical or proprietary names used by the speaker to describe market dynamics.

💡Volatility Skew

Volatility skew refers to the phenomenon where options with different strike prices have different implied volatilities. It is a measure of the market's expectation of downward versus upward price movements. In the video, the speaker discusses the implications of a low volatility skew and its potential impact on market behavior.

💡Market Microstructure

Market microstructure refers to the specific rules and mechanisms used in the operation of financial markets and the impact these have on the behavior of securities' prices. In the video, the speaker discusses how seasonality affects market microstructure, particularly during holiday periods when trading volume and days can be significantly different from the norm.

💡Short Interest

Short interest refers to the total number of shares that have been sold short but have not yet been covered or closed out. It is an indicator of market sentiment, as a high short interest can indicate that many investors expect the price of a security to decline. In the video, the speaker mentions short interest covering as a potential driver of market behavior.

💡End of Year Chase

End of Year Chase refers to the tendency of investors to adjust their portfolios at the end of the year to meet certain performance targets or to take advantage of tax-loss harvesting opportunities. In the video, the speaker suggests that this behavior could contribute to market strength in the final months of the year.

💡Fiscal Stimulus

Fiscal stimulus refers to government actions to boost economic activity, usually through increased government spending or tax cuts. In the video, the speaker discusses how fiscal stimulus can influence inflation and market behavior, particularly in the context of structural inflation.

💡Structural Inflation

Structural inflation refers to the persistent increase in the general price level of goods and services in an economy due to long-term factors such as changes in production costs, demographics, or technology. In the video, the speaker argues that despite short-term cyclical fluctuations, the underlying structural factors are likely to keep inflation elevated in the long term.

Highlights

Event Falls and market rallies, driven by Vana and charm effects, occurred despite worst-case scenarios.

Lower CPI was expected, but the event V compression was the main driver of the recent market rally.

Seasonality becomes important in the November to December period, affecting market micro structure and volume weighted time.

Shortened time during holidays like Thanksgiving and Christmas leads to accelerated Vaan and charm effects.

The Wall Street adage 'never short a dull market' reflects the structural positive flows that drive the market over time.

The market is entering a window of non-straight strength due to the beginning of the monthly OPC cycle and holiday season.

Healthy digestion in the market is driven by vult targeting ctas and trend following flows, which are strong during this window.

Skew is in the zero percentile, indicating a low demand for skew and potential market vulnerability to shocks.

The metaphor of sitting in a room ankle-deep in gasoline illustrates the potential for accelerated market reactions to shocks when skew is low.

Owning V when skew is low and Vaan is declining into a support area is historically a good time to own volatility.

The market exposure has shifted from a hedged position to a more crowded, unhedged scenario, increasing the potential for a larger market impact.

Positive news like lower CPI and potential US-China reconciliation has driven recent market optimism.

Despite positive news, structural inflation remains sticky due to factors like dollar weakness and commodity prices.

China's reopening and potential policy changes may increase demand and affect commodity prices.

The expectation is for a buy the rumor, sell the news moment in Q1 when the Fed pauses, which could lead to a market turn.

Structural inflation is expected to continue, driven by long-term factors like demographics and populism.

Inflationary periods initially push up nominal assets, but second-order effects can lead to reduced investment and compressed multiples in the equity market.

The market should be watchful in the medium term, as declines often occur after the Fed has pivoted, not before.

Energy and commodities are expected to be strong for the secular move, despite cyclical pullbacks.

The coming decade is likely to see a continued focus on energy and resource scarcity, with opportunities to add to positions on market dips.

Transcripts

hello and welcome back to the November

episode of the macro and flows

update um last time we talked we had

spoken about uh on the Flow side the

event Falls that sat out in front of us

for uh CPI the

election um as well as uh the FED

meeting and we had mentioned that much

like during brexit um the

2016 Trump election the

2020 uh contested election all of the

worst case scenarios as expected by uh

by the markets that a priced to high

event fall eventually led to despite the

worst case scenario happening um a rally

back those are the Vana and charm

effects at work um in the form of EV

event fall when that event gets

compressed uh all of a sudden no matter

what the outcome no matter uh you get

these positive flows and that's what we

saw yes we did have a

positive um uh event in in a in a lower

CPI but that wasn't a huge surprise

really that was uh to to many greatly

expected it really was that event V

compression that drove uh that that huge

rally that we had V has been absolutely

decimated since that uh since then and

uh with the holidays sitting in front of

us here this week um as well as then

heading into December uh seasonality

becomes important we've talked about

this in newsletters over the over the

year and a half as well as on on these

macro and flows updates but just to

reiterate seasonality is not a magical

construct it is not something that is uh

you know uh looking at calendar dates

and just because of the days in the

calendar that the market goes up it it

is has real structural underpinnings to

Market micro structure um again time is

shortened there's much more holiday days

um in this November to December uh

period uh through through early

January um on top of that uh there's a

lot of days these are different holidays

these are Thanksgiving these are

Christmas these are periods when people

take time off uh to get away um and that

volume weighted time we call it is

significantly shorter um the Friday

after Thanksgiving it's a trading day

but not really right uh historically

it's a very very low volume day um and

hence the time is actually quite a bit

shorter for example um

this this time shorter time accelerates

charm It accelerates vaana and there's a

circular force that drives positive

flows underneath the market this is what

drives the saying of never short a dull

Market this is a very uh kind of

well-known uh you know Wall Street adage

that goes back hundreds uh you know 100

years um you know you never short a

short a dull Market because at the end

of the day as time passes there are

structural positive flows that in the

market as time

passes despite all of that we talked

about this before we've seen quite a big

rally um we are entering a structural

what we call a window of weakness again

really a window of nonstraight strength

doesn't mean uh this is going to be a

weak period but it means theana and

charm flows are generally lower at the

beginning of the monthly OPC cycle um

and we are there currently um that means

there's there's likely to be uh you know

Less in this window and but they will

Etc accelerate um faster like I

mentioned because of the holiday season

so somebody think about a little bit of

push and pull right now at this exact

moment but again with seasonality going

into the end of the year there should be

continued strength um on top of that um

you know we've had a healthy digestion

driven by vult targeting ctas Trend

following flows that are considerably

strong during this window uh and that

are accelerating with v compression

which I mentioned is

significant um not to mention kind of

short interest covering um and and just

brought end of year Chase for

performance

um you know all this seems quite

positive uh in this this one month uh to

two Monon period um that said things to

be thoughtful of on the on the Flow side

you know skew is in the zero percentile

that is the lowest in the equity indexes

in the S&P um than than we've ever seen

it um what does that mean you know if

implied volatility skew is low um that

generally points to entities not buying

that skew right that uh and uh there'd

be more supply of it more sellers of

that skew you know as we've talked about

throughout the year early in the year

that skew was at the 998th 99th percent

that was very high people were very very

um well hedged and that's caused a

decline that was very very managed and

that that compressed realizable now

we're beginning to see uh a very

different type of

landscape um we've kind of talked about

this uh you know the metaphor is we've

been sitting in a room with pillows

surrounding us uh you know we if

something were to happen that doesn't

mean we're going to fall over that

doesn't mean we have a problem it just

means that there's uh there's not an not

only not an accelerate when skew is high

when people are hedged but quite the

opposite it's it's okay if you fall over

the the Market's going to be broadly

cushioned and and whatnot

now we're sitting in a room you know

ankle deep in gasoline um and and again

that doesn't mean anything bad's going

to happen per se but uh you need to be

mindful of a shock uh when it does

happen uh you know there can be an

acceleration and uh you know this is

something we saw in Feb to March of 2020

yes Co drove that but not not a

coincidence that the day after Feb

monthly expiration the decline started

and the day after March quarterly

expiration the decline ended we knew

about covid in dece late December early

January Market continued to Rally

throughout that period so it really

wasn't Co that kicked things um off uh

you know that was the spark but it was

the gasoline on the floor with the Feb

expiration that happened that eventually

led to the

explosion um so uh you know V is here

falling to meet support uh sitting the

vix is sitting at

23 um again that 20 uh vix area and PV

at the money has historically been in

particularly in a higher V regime has

been the best The Sweet Spot of when to

own VA again we' mentioned this but uh

implied VA performance is kind of like a

u when it's very low um there tends to

be pinning and very low uh you know

outcomes it's not not that you want to

always buy V low and sell it High um

quite the contrary um it's in a lot of

the low and the majority of the

scenarios when it's very very low you

don't want to own it but here declining

into to a 20 ball in an otherwise higher

Vol regime is historically according to

the data one of the best times to own

b um on top of that um important to note

why low skew is um you know is gasoline

on the floor uh not only are people not

hedged as we mentioned which means

reflexively when the market goes down

they will need to hedge um and uh you

know there are short V sellers who you

know have higher likelihood of getting

pushed out right that's why is low but

importantly we simply in basic basic

terms are buying something very low when

you buy uh V and skew at these levels

and the potential energy is significant

to put it in basic terms if if you own

um a 20 Vol um with a flat skew that

means your uh you know 10% out of the

money put right now is still on a 20 Vol

right um but if you uh are on a 30 vol

right um and your skew is more at a

historical normal for 10% out of the

money put let's say somewhere around uh

uh two uh 2x the VA you would actually

be looking at a 60 Vol out of the money

dramatic difference 20 Vol versus 60 so

it's not just at the money ball and that

vix being lower which is part of it but

really the dramatic difference at how

how low implied volatility is relative

to history for those out of the- money

puts and that convexity that um

historically can can really outperform

so huge potential energy for that to go

higher in a situation where where

markets become unpinned uh on top of

that uh as we mentioned you know that at

the money ball is now declining into a

support area so a lot of reasons um

outside of this seasonality in the short

term to start looking at Hedges little

bit further up a little bit um you know

where you're not going to experience

maybe as much Decay but really where you

might be able to um you know benefit as

that starts to Rise um and and the

potential for something you know comes

to fruition late into the end of the

year probably more likely even in in

q1 you know to put it in contrast the

you know if we're looking in January of

this year before the decline the

majority of the world you know if I had

to put an estimate on it was was you

know 100% or so you know 90% equities

but let's say 100% equities with with a

hedge with a significant hedge because

there there was you know the the thought

was that ball was very low think of them

owning a uh you know a

10% um you know out of the money put

sorry a 5% out of the money put the 30

Delta um so they had 70% exposure to the

market there short 30 deltas and some uh

5% of the money put a 30 Delta 70 uh 70

beta in theory according if you put

those two together and and how the

perception is um now there's essentially

zero uh hedge in that portfolio because

people hasn't worked throughout the year

people have removed um those Hedges

instead they reduced Equity exposure uh

1: one so there's 70% exposed still that

hasn't really changed right their net

Delta has not changed but the difference

between those two positions is quite

remarkable um in a in a situation where

you have 70% Equity you're still losing

7% all the way down in the market and

eventually that's a problem whereas if

you own 100% equity and have 5% out of

the money put after a 5% decline you're

hedged um so very different type of

exposure um much bigger tail loss is

much less convexity obviously but it's

important to note that's kind of the

difference in terms of Market exposure

that we had uh you know earlier in the

year versus where we are looking now so

much more crowded uh many more people

that will have to go out out that same

door if we have an issue and again a

macro landscape that is obviously still

um quite treacherous

so now pivoting to the more macro

landscape you know what like we

mentioned we have gasoline up up to our

ankles or so at this point in the room

but what's the spark what's ultimately

going to drive this at this point

obviously um there have been a couple of

positive pieces of news lately uh you

know there's there's growing

optimism um why because CPI is finally

declining a bit um you know we people

are expecting some type of pause the FED

is Broadley been saying they're likely

to slow down and take a look uh wait for

the lag to process um through through

some of these numbers um and slow

down um top of that very recently we had

uh the G20 and we had a fairly long

meeting between the US and uh China

which has been a major concern for many

people um you know three and a half

hours of of meetings um some signs of

potential reproach men which would be

obviously very good news um you know

that lower CPI

that that that uh that thought that

maybe things won't get as bad uh you

know is has driven a lot of Hope into

the market but important to note from

the inflationary perspective um you know

we've experienced significant inflation

um in the last year um despite much High

you know a very very strong dollar right

the FED part of the reason the FED

raises rates um like they do is to

really Force dollar strength because

when you get dollar strength that means

importing things is significantly

cheaper we are allowed to Able able to

then export um part of the inflation on

top of that um we've uh you know the

government instead of the FED has now

has also UPG running into the election

released a tremendous amount of the spr

um spr is almost uh empty at this point

that um obviously was also very helpful

in containing inflation uh you know

during this period and and despite that

we had significant inflation so just to

see kind of a little little bit lower

inflation a 7.7 uh reading and again we

we believe with the lag effects there

will continue to be a decline down

likely even into the six handle you know

lower six handle maybe even higher fives

um you know in in the next uh you know

six months um that said uh these these

factors are now reversing right the

dollar weakness we've seen uh you know

is significant um in this month um the

you know the Dixie has declined

tremendously uh the commodity put now is

is back into the market um you know the

Biden has has very clearly stated that

they plan to refill the spr at70 to $72

a barrel um you know I think it's fair

to say OPEC uh plus will be stepping in

again and people have very short

memories um all of those things are

actually broadly going to be very

supportive of of structural inflation

and and despite you know the lag effects

and the declines in CPI we we expect

that that inflation will actually

structurally remain quite sticky um

don't forget uh China despite all the

good news we're seeing about reproach

men China is broadly starting to reopen

a bit there's a bit more stimulus coming

from from the Chinese government um and

talk now that that Z has been reelected

about backing away from some of these uh

fairly unpopular um restrictions we

believe that they won't step away from

it altogether the tools are still there

to bring back in for control much like

we've talked talked about um but they do

broadly want to increase demand that

would be a huge uh you know differen

maker um you know on the commodity side

of things uh you know particularly since

the last year we haven't really had that

demand um and that's uh that industrial

demand is so so important to those

Commodities so from a macro perspective

a lot of glasses uh half full thinking

out there which we believe is really

more a function of the event fall

seasonality all the things that are

actually happening people are becoming a

bit more complacent the longer term uh

view has not really changed in the

shortterm yes uh likely to be uh a bit

slowing CPI that was never a surprise

that has been broadly expected um and if

anything the actual factors that may

stimulate higher inflation more

structurally um continue um to to not

only uh continue to be in place but in

some ways are actually getting worse so

you know it really is our view and we've

been talking about this for some time

that there is going to be a buy the

rumor sell the news uh moment here that

probably will line up in the first

quarter um upon the FED truly pausing um

you know uh you know I doubt there's

going to be a pivot a true pivot but a a

a pause you know we're likely to see

markets kind of continue to push higher

into that moment and uh you know when

that moment comes that that'll likely be

be the moment to kind of turn and again

with gasing on the floor um you know

anything could happen between now and

then uh that you know any major Spark

uh something unexpected um or even you

know less expected could be could be an

issue um you know to note in the past 50

years um all in all the bare markets

we've had in the last 50 years uh the

the majority of the declines the you

know the overwhelming majority 80% plus

um have occurred after the FED has

actually pivoted um so you know it's not

like the declines happen the FED pivots

and the market turns that's what most

people think it's actually quite the

opposite um so you know broadly uh you

know it would make sense for this Market

to Rally during this period to or at

least stabilize Vol with the Vol

compression um in the medium term but

then three six months out um you know

Time To Be watchful we still again to

back up now to 30,000 ft um you know we

want to reiterate this is a a secular

move in inflation uh We believe We

believe the structural things that are

causing the are things like demographics

which are Destiny uh things things like

uh you know populism that are a function

of our 40-year cycles of monetary policy

um that are happening uh in in a younger

generation um you know that is truly um

you know at 40% of of the household

formation and wealth creation of the

Baby Boomers at their time are truly in

a in a period where they need to also

catch up so these are things that are

going to be very very hard to um undo in

terms of structural inflation we've seen

how these things work um and they don't

go in a straight line again important to

note uh during the 60s and 70s um you

know the last period of of structural

inflation uh these you know we had three

recessions uh 69 to 70 74 75 again 80

early 80s um three uh significant uh

recession so it's not like uh you know

we didn't get tremendous draw Downs in

in inflation CPI during those periods we

did but the key is each time the FED

paused they went you know we got higher

and higher inflation and structural

inflation went higher that is broadly

what we expect so don't don't get lost

between the cyclical and the structural

and the cular the the cyclical uh you

know we're getting a a a downturn in

inflation could very well last six

months um uh but the key here is is

inflation s should continue to make um

you know higher lows um throughout this

period and we believe that that will be

met each time we have recession will'll

be met with more fiscal stimulus more um

more demand push

economy um not to mention you know more

geopolitical Strife more competition uh

globally uh more resource scarcity um

and ultimately quite a bit more um

competition so we we are very bullish

energy uh very bullish U Commodities

longer term this is not the next month

uh right we're in a cyclical period

period where we're likely to get a

pullback but those are the things you

want to continue uh to add to in you

know for a secular trade um much like we

had a fed put you know in uh you know in

the equity Market um ultimately and risk

assets uh you know compressing uh yields

in the 10-year uh and and and and do and

the dollar um you know

ultimately um you know now that that's

gone there's a dual mandate the FED

really uh doesn't have the the strength

to the fed put that they they have had

over the last 40 years um now other

entities like OPEC plus and and energy

producers in a world of resource

scarcity have more power um and now

there's more of an energy oil put um as

well as um you know other puts across

the resource space so we believe uh very

strongly that that that is the secular

move that we're likely to see and you

will get declines um you know relatively

big ones throughout this period but they

uh the real move is is to ultimately

attempt to you know continue to add much

like you would have done with equities

for the last 20 years um on dips um in

the energy

space so um but you know important to

also you know finally note that uh that

inflationary periods despite

counterintuitively first order effects

push up nominal assets right not just

Commodities but you would think equities

as well right that they there are assets

at the end of the day nominally if

you're getting a 10% inflation rate you

would think think those assets would

also uh increase you know 10% again

counterintuitive significant similar

inflation during the 60s and 70s that

market didn't go anywhere for 14 years

um in nominal terms lost 70% of its

value in real terms why is that and know

we've said this before but just to

reiterate um second order effects and

you know I can name five uh we've done

this before on the macro flows update

but I want to keep this front and center

right um you know you get uh reduce

demand broadly when interest rates go

higher because there just less money

floating around less money chasing

assets particularly uh to the investment

class into

corporations two uh you get the reverse

Tina effect right all for for 20 years

we've had decreasing interest rates

right decreasing bond yields uh and

ultimately that meant there's less

places to invest so there is no

alternative people went into risk ass

assets and equities now we're actually

seeing an unwind of that b yields are

going higher a lot less people are

willing to sit um in in Risk assets when

they can get

45% um in some of these uh

yields uh Vol and risk Premia goes up

what do I mean by that when you have

less liquidity in the market you have

less market makers less entities who can

absorb risk and that means volatility

goes up uh you know higher interest

rates are are associated with with

higher uh volatility levels broadly that

higher risk premum drives more risk and

means risk assets risk assets are not as

good in investment and reduces um you

know investment margin compression so

earnings themselves even though GDP

tends to be strong Revenue growth tends

to be strong you tend to get margin

compression these periods as well and

then lastly the most kind of obvious the

discount rate you know Investments are

just not as worthwhile um when you have

to Discount Net Present Value back with

a much higher interest rate so a lot of

reasons these are second order effects

to inflation uh increasing of interest

rates that ultimately Drive these things

um and that ultimately dramatically

compresses multiples um in the equity

market so we believe that this is the

next decade that we're looking at it

won't be a straight line um obviously

this is not a month month issue but for

the time being seasonality is very

important the Von and charm flows the

supportive

window um due to those um as well as uh

you know uh broadly you know going into

the end of year this Chase is likely to

continue V compression most importantly

is likely to continue that optimism into

that coming pause that we feel will be

coming in q1 um is also important but we

do believe this is leading to a a sell

the news event um and ultimately one

that's much more dangerous than just the

ones we've seen um and again it may last

to it may take to Q2 uh you know these

things uh aren't necessarily coming in

q1 but coming down the road we do

believe uh that there is a major tail

sitting out there in the not too distant

future so as always thank you for

joining me uh you know have a great

holiday season um and be

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