Macro and Flows Update: February 2023 - e14

Summary

The 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

00:00

📈 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.

05:01

💡 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.

10:03

🔄 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.

Keywords

💡Macro and flows update

The term 'Macro and flows update' refers to a comprehensive review or analysis of broad economic factors and their impact on financial markets. In the context of the video, it signifies an episode focused on evaluating the state of the market and predicting future trends based on macroeconomic indicators and liquidity flows.

💡Counter Trend Rally

A 'Counter Trend Rally' is a market movement where prices rise in the opposite direction of the prevailing trend, often after a period of decline. In the video, this term is used to describe the market's recovery from a downward trend, which the host had anticipated and discussed in previous updates.

💡Seasonality

Seasonality refers to the pattern of behavior in financial markets that tends to repeat at regular intervals over the year, often related to holidays, weather, or other predictable events. In the video, the host explains that late December and early January did not experience the usual seasonality, such as the 'Santa Claus rally' or the 'January effect', due to the negative performance and liquidity issues.

💡Liquidity

Liquidity in financial terms refers to the ease with which assets can be bought or sold without affecting the asset's price. High liquidity means that there are many buyers and sellers, and transactions can occur smoothly. The host discusses how negative liquidity impacted private equity and venture capital, as well as the overall market performance.

💡Inflationary Impulse

An 'inflationary impulse' refers to a factor or situation that causes an increase in the general price level of goods and services in an economy over a period of time. In the video, the host suggests that the market is entering a period of secular reduction in liquidity driven by an increase in inflationary impulse, indicating a long-term change in the economic environment.

💡Demand Push Economy

A 'demand push economy' is characterized by increased consumer demand that drives economic growth, often leading to higher inflation. In the context of the video, the host describes the shift from a supply-side economic bubble to a demand push economy, which is expected to result in stronger GDP growth but also to reduce liquidity in the market.

💡Volatility

Volatility is a measure of the variation in the price of a trading instrument over time, often used as an indicator of the risk associated with trading or investing in that instrument. In the video, the host discusses volatility in the context of market movements and predictions, particularly in relation to the counter trend rally and the expected market weakness.

💡V compression

V compression, or volatility compression, refers to a decrease in the range of implied volatility of options, which can indicate a convergence of expectations about future price movements. In the video, the host mentions massive vault compression as a factor contributing to the market's movement and the potential for future volatility.

💡FOMO

FOMO, or the 'fear of missing out', is a psychological phenomenon where individuals feel anxiety about missing out on rewarding experiences that others are having. In financial markets, it can lead to investors increasing their exposure to assets because they worry about missing out on potential gains. The host mentions FOMO building among market participants as the market rallies.

💡Sentiment

Sentiment in financial markets refers to the overall attitude or feeling of investors towards a particular security or the market as a whole. It can influence trading decisions and affect market direction. In the video, the host discusses how improving sentiment, fueled by a perception of a 'Goldilocks' economy, might impact the market.

💡Market Crash

A 'market crash' is a sudden and significant decline in the value of a market, often triggered by factors such as economic events, investor panic, or systemic issues. In the video, the host discusses the potential for a market crash on February 15th, based on their analysis and predictions.

💡Opex

Opex, or 'options expiration', refers to the date when options contracts become void and cease to exist. This can have significant effects on the market as large numbers of options contracts are exercised or allowed to expire, potentially leading to increased market volatility. In the video, the host mentions the impact of the big March Opex on market dynamics.

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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