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T-Day landings and liquidity

  • 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

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Deficits, debt, and dollar devaluation

  • 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

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Seriously and literally

  • 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

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QT and the debt ceiling

  • 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
Fed reserves changes vs credit spreads, rolling 6m

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When shocking behaviour meets shock-proof 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

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Free clip: When the positives are all priced

  • Free excerpt from 22 Jan webinar
  • The US economy is indeed exceptional
  • But the performance of its markets owes just as much to an extraordinary funnelling of fund flows
  • Dissecting the drivers of these flows sheds crucial light on the durability or otherwise of the risk rally
  • Free to view by all; full replay available only to clients with Group Webinar or One-on-One subscriptions

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When the positives are all priced

  • Where consensus sees US exceptionalism
  • We see a funnelling of fund flows
  • Here's how to trade it

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Some shameless self-promotion (free to view)

  • A chart of publication titles against price action
satori publication dates and titles against hyg prices

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What role for liquidity in 2025?

  • 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
us equities appear to decouple from cb liquidity

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Ten reasons to take profit

  • 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

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