April 2025 | Macro and Flows Update

Summary

In this April 2025 macro and flows update, the speaker discusses the aftermath of a market decline forecasted earlier, highlighting the effects of rising interest rates and structural inflation. They argue that populism and protectionism are fueling long-term inflation and wealth rebalancing, despite attempts to slow the economy. The speaker also reflects on historical parallels, like the 1968-1982 period, and suggests a lost decade for markets. They emphasize caution in investment, recommending non-correlated strategies and long volatility hedges, while acknowledging uncertainty and a potential 40-50% market decline.

Takeaways

• 😀 The market has experienced a significant decline (21-22%) followed by a 10% rally, leaving the market down by 13-14%.
• 😀 The rise in long-term bond yields, particularly the 10-year bond, has caused concerns for the administration, especially during the market downturn.
• 😀 The belief that slowing the economy and decreasing markets would lower inflation has proven incorrect, with inflation remaining a persistent issue.
• 😀 Structural inflation, driven by populism and protectionism (such as tariffs), is likely to continue, resulting in a rebalancing of wealth towards domestic spenders.
• 😀 The political landscape, particularly the growing influence of millennials, continues to push for more populist and protectionist policies, adding to inflationary pressures.
• 😀 Short-term economic adjustments, such as attempts to lower short-term inflation, will likely exacerbate structural inflation and increase fiscal spending.
• 😀 There is an ongoing shift away from traditional supply-side economics, as exemplified by Elon Musk's departure from the populist side of the political spectrum.
• 😀 The current period resembles the 1968-1982 era, potentially leading to a lost decade for the market, with compounded inflation eroding wealth over time.
• 😀 Investors should be cautious and avoid exposure to interest rates and duration risk, focusing instead on non-correlated strategies such as long volatility and diversified alternatives.
• 😀 The global political dynamics, particularly with Japan, could lead to some initial tariff negotiations, though the potential gains for the US may be limited in the short term.
• 😀 The market is expected to experience uncertainty due to a combination of bond market volatility, reduced demand from major international players (like Japan and China), and heightened risks in the equity market.
• 😀 Non-correlated assets, such as long volatility and inflation hedges, are recommended as safe investment options during this period of market turbulence.

Q & A

What was the market forecast from last year for the February to March decline?

The market was forecasted to decline by 10-15%, but the actual decline turned out to be around 21-22%, followed by a brief rally. Currently, the market is down about 13-14% after the rally and subsequent 2-3% decline.

What was the role of the 10-year bond yield in the market's recent performance?

The 10-year bond yield increased during the market decline, which caused significant concern in the administration. The expectation was that the rising yields would reduce inflation, but instead, it led to higher inflation, contradicting the initial plan.

What is the structural inflation that the speaker refers to?

The speaker identifies structural inflation as being driven by populism, protectionism, and tariffs. This form of inflation is considered persistent and long-term, as it involves wealth redistribution domestically and increases inflationary pressures.

How does the speaker view the potential for supply-side economic policies in the current environment?

The speaker believes that any attempts at implementing supply-side economics will face significant resistance due to the populist nature of the current political environment. If supply-side policies are pushed, it may result in a backlash from the public, particularly the poor.

What historical period does the speaker compare the current situation to, and why?

The speaker compares the current situation to the period from 1968 to 1982, when the U.S. experienced a prolonged period of inflation and market stagnation. This comparison is used to highlight the potential for a 'lost decade' with compounded inflation and stagnant market performance.

What impact does the speaker predict inflation will have on the market over the next decade?

The speaker predicts that inflation will continue to erode wealth while the market remains stagnant for the next decade. The expectation is that inflation will cause real losses, similar to the 1967-1982 period, leading to a 'lost decade' of low returns.

What investment strategies does the speaker recommend in light of these economic conditions?

The speaker advises against traditional, beta-heavy portfolios and recommends non-correlated strategies, such as long volatility positions, alternative investments, and insurance hedges. These strategies are seen as defensive against the ongoing market uncertainty and inflation.

Why does the speaker believe the current market situation could resemble the period of Nixon's administration?

The speaker draws a parallel to Nixon's administration, which attempted supply-side economics during a period of populism and inflation. However, Nixon’s policies were ultimately unsuccessful, and the speaker predicts a similar outcome in the current administration due to public backlash and rising inflation.

What role do international markets, particularly Japan, play in the current economic outlook?

Japan is seen as a key player in the U.S.'s tariff negotiations due to its geopolitical relationship with China and its dependence on U.S. support for commodities. The speaker believes that Japan is highly motivated to reach a deal with the U.S., which could influence broader international market dynamics.

What is the expected market decline based on current conditions, and what factors contribute to this?

The speaker expects a market decline of 40-50%, influenced by uncertainty, reduced demand from international markets like Japan and China, and the volatility introduced by rising bond yields. This creates an environment of reduced investor confidence and lower market performance.