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  • We have been arguing markets face greater risk of melt-up than melt-down
  • But the speed and extent to which many levels are deviating, not only from fundamentals but even from many technicals, is striking
  • Expect fund inflows to continue to swamp such concerns - but watch for any sign of faltering
  • The significance of last week's FOMC lies neither with the rate view, nor with the earlier, larger taper of QT - mildly bullish though both of these are.
  • It comes instead from the stark asymmetry of the response function which was described.
  • While the true test remains with the details of the liquidity outlook, in conjunction with the Treasury refunding this opens the door to a continued cross-asset rally through Q2.
  • Free clip from first ten minutes of 2 May webinar
  • The exuberance in risk assets is less a consequence of a stronger economy than a driver of it
  • The expectation of rate easing was never critical - which is why the exuberance has largely persisted even as yields have backed up
  • It is instead the direct consequence of investor crowding following easy central bank balance sheet policy - and vulnerable to any reduction in CB liquidity
  • Relative CCC cliff risk has risen to record highs
  • This partly reflects hidden idiosyncratic risks from low recoveries and abandoned covenants
  • But mostly it signifies the macro suppression of index spreads
  • The $280bn weekly drop in Fed reserves is the largest since Apr22
  • Just as then, it coincides with a correction in markets
  • A drop in fund inflows seems likely to follow
  • But this still feels more like seasonal correction than decisive turn
  • Financial conditions have eased to the same levels as 2007
  • This comes in spite of central banks thinking they are running restrictive policy
  • The nature and timing of the market moves suggest these not so much reflect or anticipate the strength of the economy as drive it
  • Their ultimate cause is easy balance sheet policy having crowded investors into risk
  • Misunderstanding of these dynamics increases the likelihood of bubbles and subsequent busts
  • The latest central bank research on QT is careful, rigorous, and grounded in the literature
  • Unfortunately its main conclusion - that QE affects markets while QT doesn't - is at odds with the lived experience of most market participants
  • There is a much simpler reason why QT has had so little apparent impact
  • Misunderstanding of this dynamic greatly contributes to the likelihood of future policy mistakes
  • The rally in risk is often attributed to strong earnings
  • But calendar earnings estimates have mostly been falling
  • Macro drivers, not organic estimate optimism, are the true source of the markets' strength
  • After several months of liquidity tailwinds, risk asset pricing is starting to look excessive
  • Improving spending, orders and hiring are all positives
  • Despite this, earnings estimates are falling
  • Fundamentals are reflective more of sticky supply than of dynamic demand
  • Ongoing price pressures may well curtail central banks' desire for dovishness
  • But excitement about higher r* remains overdone
  • Free-to-view replay of first segment of 16 Jan webinar
  • Why strategists struggled in 2023
  • A better way to think about markets
  • Implications for 2024

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