Research

To view research in full – and see the charts properly – you need a paid subscription.

The unbearable momentum of momentum

Multiple markets are in melt-up - and for fifteen years, momentum has trumped mean reversion
This feels instinctively unhealthy, and rightly so: crowding and herding really are at extremes across asset classes
But it is not the sell signal it seems - neither for indices, nor for Momentum itself
What crowding changes is the tail, not the trend: the real risk is a correlation spike

The turmoil in markets says as much about positioning as it does about stagflationary risks or the mercuriality of President Trump
The immediate flight into $ cash reflects the unwind of active positions
But beneath the surface – and gold’s dramatic fall notwithstanding – the US’ safe-haven status is visibly fraying

War in the Middle East is interacting with prior market vulnerabilities
The problem lies neither with the growth outlook nor with the risk of an inflation spike
It is that investors suddenly have multiple reasons to shift from what had already been violent risk rotation to outright risk reduction

Warshian balance sheet contraction need be neither psychological thriller nor horror flick
Non-US jurisdictions combine lower reserves with less money market volatility
It's just a question of shifting from supply-led to demand-led liquidity provision

Markets are starting to recognize the radicalism of a Warshian Fed
But they are pricing its impact too narrowly
The key involves understanding the link between balance sheet, rates, and affordability

The more markets rise, the greater is the gap to consumer sentiment
We are used to explaining this in terms of a K-shaped economy
But together with record profit share and margins and the narrowness of the equity rally, it is also consistent with monopolization, regulatory capture and enshittification
This helps explain why not only labour but also consumers are suffering, implies a critical role for politics - and ultimately paints a more fragile picture of society collapsing towards technofeudalism

Markets are reeling from a monetary triple whammy: repo tightness, a faltering of other forms of credit creation, and a record $900bn in reserves drainage
But all these sources of monetary tightness ought to ease
The question is whether this episode drives a more enduring reduction in risk appetite and fund flows

US repo rates have already spiked beyond year-end levels
The squeeze seems likely to continue - and intensify - while the US government shutdown does
The immediate consequences are $-positive and risk-negative - but mostly point to a deeper unwind of crowded hedge fund positions

In a narrow technical sense, the FOMC was indeed hawkish
But in the cessation of QT and through questions, it more broadly reconfirmed a reaction function at once deeply asymmetric and completely oblivious to asset price inflation
This paves the way for a further melt-up in risk assets and havens - and for more assets to exhibit the sort of exponential sawtooth boom-bust recently seen in gold