Notes – Satori Insights

Gradually, then suddenly

The bounceback in risk is unconvincing
This is in part because of overoptimism that tariffs and economic pain can be avoided
It is also because sentiment across markets has moved much more than actual positions
But ultimately it is because Hemingway’s famous quip applies as much to reserve currencies as to personal bankruptcy

The announced headline tariff rates are all over the place
But tariffs in general are more punitive than consensus expected, even after the inclusion of VAT
The immediate market response is being clouded by liquidity factors

Despite all the attention to tariffs, short-term market moves remain surprisingly well correlated with CB liquidity
Liquidity dynamics have the potential to amplify any T-Day relief rally
But we would still fade any such move thereafter

It is remarkable that proposals for a Mar-a-Lago accord have not yet sparked an even greater flight out of US dollars, debt, and risk
That they have not yet done so is thanks to a mix of incredulity, inertia, and temporary liquidity factors
Current account deficits, though a source of vulnerability, are in many respects a measure of attractiveness to foreign capital
What’s damaging is when – as in the US – they are allowed to turn into ever-escalating debt
What the Mar-a-Lago proposals’ discussion of sticks and carrots lacks is a proper notion of trust – and of the scale and suddennness of the consequences once it has been lost

Markets’ response to the evident risks has thus far consisted primarily of risk rotation
This seems increasingly likely to evolve into full-fledged risk reduction
That it has not done so to date is thanks not only to dwindling hopes that Trump is bluffing, but also (yet again) to support from central bank liquidity

Fed Minutes suggest pausing QT “until” resolution of the debt ceiling
This would amplify market volatility, not reduce it
Either the Minutes are poorly drafted, or else reflect deeper misunderstandings of how balance sheet policy affects markets

US economic exceptionalism remains alive and well
But in markets, many Trump trades have been faltering
Markets’ overall behaviour remains Panglossian thanks to a combination of falling real yields, a temporary boost from CB liquidity, and animal spirits
But we see reasons to doubt the longevity of all three

It is tempting to look at the performance of US equities in 2H24 and conclude that central bank liquidity no longer matters for markets
But a closer examination of both other markets and shorter timescales suggests this would be a mistake
It instead highlights the predominant role currently being played by fund flows and US exceptionalism
While it is possible to paint scenarios where liquidity contributes to a melt-up in risk in early 2025, on balance we see it as one of a number of reasons to be skeptical of the bullish consensus

Many fundamental indicators show a sudden deterioration
In combination with markets’ Panglossian interpretation of prospects under Trump, these represent reasons to take profit
Too much of markets’ performance comes from a fiscally-driven surge in fund flows