Macro and Flows Update: June 2023 - e18
Summary
TLDRThe video discusses the current economic climate, focusing on the Federal Reserve's actions in response to core inflation stabilization at around 5%. Despite headline CPI decline, the Fed increases interest rates by 50 basis points, indicating a misunderstanding of the situation. The market's rally, driven by short squeezes and options trading, is contrasted with the anticipated liquidity draw and potential market liquidation by year-end. The video suggests a shift from NASDAQ outperformance to a more negative outlook, recommending strategic hedging and a focus on downside opportunities.
Takeaways
- 📈 The core inflation has stabilized at around 5%, indicating a secular sticky inflation trend.
- 📉 Despite headline CPI decline due to cyclical pressures, the Federal Reserve is actively using interest rates to combat inflation.
- 🚀 The FED increased their dot plots by 50 basis points, surprising the market.
- 💹 The market largely ignored the FED's actions, with yields declining on the day of the FED meeting.
- 🌐 Central banks globally are tightening liquidity, affecting markets outside of China.
- 🏦 The US interest rate market has experienced a 5% lag, impacting liquidity in the economy.
- 💰 The Treasury General Account needs to refill approximately 1.4 to 1.6 trillion in liquidity, impacting the system by year-end.
- 📊 Market rallies have been driven by Vana and charm and volatility compression, leading to short squeezes.
- 📈 The market has seen significant upside, particularly in the back end after two to three months.
- 🔄 Positioning incentives have made a U-turn, with sentiment indicators showing more bullishness and less bearishness.
- 🔽 The NASDAQ is expected to underperform as volatility declines in the short end of the curve, leading to a market downturn.
Q & A
What was the recent CPI report's impact on the market?
-The recent CPI report showed a slightly weak headline but core inflation remained sticky, around 5%, indicating a stabilization of core inflation which is a critical secular aspect of the economy.
What does the term 'secularity' refer to in the context of the script?
-In this context, 'secularity' refers to long-term trends or conditions in the economy, specifically relating to inflation and interest rates.
How has the Federal Reserve responded to the current economic conditions?
-The Federal Reserve has increased its dot plots by 50 basis points and is using interest rates to influence the economy, despite the headline CPI showing a decline due to cyclical pressures.
What does the term 'dot plot' refer to in the context of the Federal Reserve?
-A dot plot is a chart used by the Federal Reserve to show the interest rate projections of Fed officials over the upcoming years.
What is the significance of the market ignoring the Fed's actions?
-The market's disregard for the Fed's actions indicates a potential misinterpretation of the current economic situation and could lead to a misunderstanding of future monetary policy impacts.
What major event in March caused a significant impact on the banking sector?
-A bank run occurred in March, which, along with the debt ceiling debate, influenced the Federal Reserve's decision to pause its actions to ensure no liquidity tail occurred.
How is the Treasury General Account affecting the market?
-The Treasury General Account needs to be refilled, which will require pulling approximately 1.4 to 1.6 trillion of liquidity from the system, impacting the market significantly.
What is the expected outcome of the liquidity draw mentioned in the script?
-The liquidity draw is expected to lead to a decline in asset demand and potentially a market liquidation, particularly in the second half of the year.
What recent market trend was discussed in the script?
-There was a sizable rally in the market, with an almost 7% increase over two to two and a half weeks, driven by factors such as Vana and charm, volatility compression, and market positioning.
What is the expected change in the NASDAQ's performance?
-The NASDAQ is expected to underperform as volatility declines, particularly in the short end of the curve, leading to a NASDAQ downtrend.
What is the recommended strategy for investors based on the script?
-The recommended strategy includes short stock focus, short put in the portfolio, and considering NASDAQ underweight relative to previous overweight positions.
Outlines
📉 Market Analysis and Inflation Trends
This paragraph discusses the current macroeconomic situation focusing on the Federal Reserve's recent report and its implications on inflation. The core inflation rate has stabilized around 5%, indicating a secular trend of persistent inflation despite headline CPI showing a slight decline due to cyclical pressures. The Fed has increased its dot plots by 50 basis points, surprising the market, but the market largely ignored this change. The Fed is not advocating for fighting inflation but is instead trying to manage it through interest rates and other economic tools. The pause in the Fed's actions is not seen as a long-term stop but rather a temporary measure to address issues such as the bank run in March and the debt ceiling debate. The paragraph also highlights the global tightening of liquidity by central banks and the impact of the US interest rate market with an 18-month lag on the economy. The Treasury General Account's need to refill by the end of the year, which will pull liquidity from the system, is also discussed, along with the ongoing quantitative tightening (QT) and debt forgiveness issues, all contributing to a sudden tightening of liquidity in the economy.
📈 Market Rally and Positioning
This paragraph examines the recent market rally of almost 7% over two and a half weeks, despite the liquidity draw and concerns discussed in the previous paragraph. The rally is attributed to the power of vanna and charm, as well as volatility compression, which led to significant buyback into poor short positioning. The market has been waiting for a blowoff top, which has finally occurred, leading to a short squeeze. The paragraph also discusses the market's positioning, particularly in the NASDAQ, and the shift in sentiment indicators towards bullishness. The increase in call buying and the potential for a market downturn, especially in the NASDAQ, is highlighted, along with the expectation of a decline by the end of the year. The paragraph concludes by suggesting that the market is entering a period of increased volatility and potential opportunities on the downside.
🔄 Market Expectations and Hedging Strategies
The final paragraph focuses on the expectations for the market in the coming months, particularly the late third quarter and early fourth quarter. It suggests that there will be an acceleration in market movements, but not a straight line, with bumps along the way. The paragraph discusses the potential destruction of call buying and delta in the NASDAQ, as well as the speculative nature of these trades. It also touches on the shift from heavy put to heavy call positioning and the dealers' need to sell stock as volatility declines, leading to a market downturn. The paragraph advises on hedging strategies, recommending a focus on short stock positions and short put in the portfolio, with NASDAQ underweight relative to previous overweight positions. The paragraph concludes by reiterating the importance of not fighting the Fed's actions and the potential for a decline in the market as the year progresses.
Mindmap
Keywords
💡macro
💡CPI
💡core inflation
💡FED
💡liquidity
💡QT
💡short squeeze
💡Vana and charm
💡NASDAQ
💡volatility
💡macro and flows
Highlights
The FED reported after a CPI that was slightly weak on the headline but core inflation remained stable at around 5%.
Core inflation stabilization indicates secular sticky inflation despite headline CPI decline.
The FED increased their dot plots by 50 basis points, surprising the market.
Market is largely ignoring the FED's actions, with yields declining on the day of the FED meeting.
The pause by the FED was not a secular pause but a wait through tail-centric outcomes.
Macro liquidity is being pulled by central banks globally, impacting the economy with a lag.
The US interest rate market has experienced a 5% lag, affecting liquidity broadly.
The Treasury General Account needs to be refilled, requiring significant liquidity to be pulled from the system.
Markets are starting to price in a liquidity draw as we enter the second half of the year.
A sizable rally in the market, up to 7%, has occurred despite liquidity concerns.
Vana and charm, along with V compression, have contributed to a higher skew in the market.
Short positioning and structural flows have led to a significant buyback into a short squeeze.
The market is at an interesting moment with an increase in market up Vup and risk to the downside.
Sentiment indicators have turned bullish, with call ratio and put positioning changing dramatically.
NASDAQ positioning is expected to lead to underperformance and a market down V down scenario.
Volatility expansion is anticipated in the later months of the year, with an acceleration expected.
NASDAQ underperformance and a decline in the back half of the year are predicted, not necessarily fast but significant.
Investors should consider hedges and decay-neutral strategies for the upcoming market conditions.
The transcript concludes with a reminder that the information shared does not constitute investment advice and should be considered with professional advice.
Transcripts
hello and welcome back to another macro
and flows update here we are uh at June
quarterly
expiration the FED has just kind of
reported after a CPI that was uh
slightly weak on the headline but sticky
once again on uh the core which I think
has been the trend we've really seen a
stabilization of core inflation which is
the critical secular part that we've
been talking about at around 5% um that
speaks to that secular sticky inflation
despite seeing headline CPI decline on
the basis of more cyclical pressures
that the the FED is really um pushing
through um with the lag and interest
rates and whatnot that's been pushing
through the
economy um don't fight the fed the FED
just came out increased their dot plots
by surprising 50 basis points um out on
the curve before flattening uh but the
market is ignoring it for the most part
right uh the day of the FED meeting
yesterday uh we actually saw yields
decline um kind of completely fighting
the FED um from macro perspective uh the
FED paused this time around but we
believe that sit at the core of a a
broad misunderstanding and
misinterpretation of what has been going
on the pause was not a secular pause it
was not intended as a a stop and C
really it was really um in order to to
wait through what has been a very very
tail Centric uh set of outcomes one with
the bank run that we saw in March as
well as the debt sealing debate and the
issues surrounding that um so the pause
really was a function of making sure
there was not a liquidation tail not uh
a a pause in terms of the inflation
fight that the FED sees itself on on a
more secular basis um not surprising to
us as we have mentioned that inflation
has been sticky and the FED is coming
back into The Fray macro liquidity not
just from the Federal Reserve but also
from other central banks globally has in
started to uh more increasingly uh you
know pull on
liquidity um we've seen this in Europe
we've now seen this in Australia um
we're seeing it globally um in most
places maybe outside of China um and
that is on most liquidity models
dramatically pulling on
liquidity that's the part with a lag
right we've already done
5% in the US interest rate Market with
an 18month lag and guess what that is
starting to hit liquidity broadly in the
economy pair that with the QT that
hadn't happened as a function of several
other effects which are now starting to
really push through the system as well
one of those major effects which I'm
sure you've heard a decent amount of is
the treasury general account draining
lead leading into the debt ceiling
debate now that we had the debt sealing
resolution guess what that treasury
general account is having to be refilled
by most metrics that's about 1.4 to 1.6
trillion of liquidity that needs to be
pulled from the system by the end of the
year um by uh most metrics they've
reduced the speed and duration of that
liquidity because of their own fears and
concerns um but by the end of this month
we're still expecting approximately 400
million uh sorry 400 billion of
liquidity draw um that's begun but
there's still a lot to come uh pair with
that not just the lag in interest rate
policy we've talked about not just the
QT that's still happening but the debt
forgiveness issues that we're seeing on
on the individual uh you know the debt
um forgiveness from uh educational uh
loans um and you're seeing uh a
situation where liquidity in general is
dramatically starting to pull all of a
sudden here as we enter the second half
of the
Year our belief is that the actual
pricing in markets or or the the
disbelief from markets um of what is
happening and what the FED will be doing
is a function of markets basically
telegraphing that the back half of the
year has awul liquidity and will Lo
likely see some level of Liquidation in
markets and a decline in asset demand as
a function um either way it represents a
draw on liquidity from markets either in
the short term or in the longer term as
a function of sticke markets um that's
the macro perspective but what has
happened in the last month why have we
seen in the face of all of this
liquidity draw and and in the face of
all these concerns a pretty sizable
rally in the last two weeks of almost 7%
two and a half weeks um pretty pretty
simple something we've talked about for
quite some time um to our investors
which is the power of Vana and charm and
V
compression we have seen we saw uh
dramatically higher skew in the last
month um this is the proverbial wall of
worry in a mathematical term um paired
with a quarter expiration with
significant open interest um you you
pair those two things together and you
get significant buyback into what has
been poor short positioning we have been
waiting for several months this is what
we've talked about in our macro flows
videos we've been waiting for that
blowoff top that that actual squeeze
before the opportunity for this Market
to turn and that was a perfect
opportunity have short positioning under
investment which we've been talking
about squeezing with structural flows
with v compression you pair ball
compression ball Supply uh with a high
skew and put positioning and guess what
as you get into that big positioning
decaying you get massive buyback into a
short squeeze so that's what we have
finally gotten brought us into this 44
uh quarter to 44 um 30 area which we
believed was toward the higher end of
where we might be and here we sit at a
very very interesting moment uh the
market has seen a significant amount of
market up vup um particularly on the
back end after two three months out um
which we believe is appropriate at this
point it represents an increasing amount
of risk to the downside in the short
term
um what uh are we looking for does this
mean a big V crash or a a a massive
Market
liquidation that part of the tail that
part of the distribution is definitely
increasing but we believe the real tale
is in a decline essentially um by the
end of the year by the by the Q by Q4
that is significant that does not mean
it needs to be fast in the short term
but that does in our belief mean a
liquidation is coming now what that
looks like we will see um positioning
incent has not surprisingly made an
absolute U-turn which is what we've been
looking for a aii sentiment indicators
have turned on a dime um people are
dramatically more bullish um
dramatically less bearish by all
sentiment indicators put call ratio
ratios have exploded to the call side
we've had record call buying in the S&P
500 record call buying in the NASDAQ in
particular in the AI names um and it's
been particular speculation
driven those
realities are very very important to the
oncoming move that NASDAQ fall
positioning in particular as V declines
here in the short end of the curve is
likely to mean more NASDAQ now not more
an a a a turn in the NASDAQ and a NASDAQ
underperformance going forward we have
called uh back in in um early late uh
late Feb early March for a turn from
Russell to NASDAQ NASDAQ
outperformance um we are now taking that
off and turning to NASDAQ put hedging um
at the very least we believe the NASDAQ
will now begin to perform in step with
the Russell and likely start to uh to
the downside at be more negative again
that is a contrarian call to what you're
seeing now and that's driven by the
dramatic turn and positioning that has
now gotten went from heavy put to heavy
call and now guess what dealers who are
short call dramatically in the NASDAQ
long stock as V comes down they have
that stock to sell so expect a market
down V down uh exercise here um in the
markets and particularly with the NASDAQ
leading that would be in the short term
U that said we do believe that we will
get V expansion calendar expansion is
the name of the game here and we believe
that as we continue into the uh later
months later uh the late third quarter
um early uh fourth quarter that we are
likely to see an acceleration of that it
will not be a straight line uh expect uh
bumps along the way but we believe uh
call buying and the NASDAQ uh for Delta
are actually going to get destroyed here
in the that La back half of the year it
has been paid very handsomely obviously
to in the gamma squeeze but not
surprisingly these trades get uh hot
first create squeezes but
eventually uh become speculative uh
money for for the market makers and we
believe that is where we are now in this
part of the cycle so NASDAQ
underperformance uh broadly Vol bleed um
in the short end of the curve uh and in
the short term Market down Vol down
um but particularly as we start to go
into um you know a month forward from
here we believe we'll start to see the
back and continue to pick up so calendar
spreads particularly the downside are
very interesting at this point um
particularly in the NASDAQ um and puts
broadly in the NASDAQ relative to
Russell here now uh which is a
significant ter from our our spoton call
in February and March um we've heard a
lot of talk about the blowoff top we do
believe that sentiment reversal that uh
speculative call versus put reversal um
is is quite the sign and it lines up
with that quarterly expiration and those
dramatic flows so an interesting time um
to to not only place Hedges but
particularly hedges in ways uh where
they are more Decay neutral and gaining
ball um as time moves forward so expect
uh a stair step down into increasing
opportunity on the downside as we get
back to the half back half of the year
so not a quick liquidation but a a
decline um in the cards as we see it
here in the short term we have been less
directional in that call and more long
call short stock leading up into this
moment uh this is the time to now um be
much more um you know short stock
focused um with uh with maybe um some
short put in the portfolio short data
longer put longer ated um and some
interesting opportunities there again
NASDAQ underweight relative to what
we've been overweight NASDAQ in the
short term so that's the flows
perspective the macro flows um in
particular um big overhang increasing in
in its bearishness uh the FED itself has
told you um what it is doing uh everyone
is ignoring it don't fight the FED uh is
is the core belief here important run we
just had time to take advantage of it uh
wishing you all the best be water till
next time this is jeem Caron from Kai
volatility with your macro and flows
monthly update be
well this does not constitute an offer
to sell a solicitation ation of an offer
to buy or a recommendation of any
security or any other product or service
by Kai or any other third party
regardless of whether such security
product or service is referenced in this
video furthermore nothing in this video
is intended to provide tax legal or
investment advice and nothing in this
video should be construed as a
recommendation to buy sell or hold any
investment or security or to engage in
any investment strategy or transaction
Kai does not represent that the security
products or Services discussed in this
video are suitable for any particular
investor you are solely responsible for
determining whether any investment
investment strategy you should consult
your business advisor attorney or tax
and accounting advisor regarding your
specific business legal or tax
situation
Browse More Related Video
5.0 / 5 (0 votes)