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Please stop meddling with my markets

  • The best explanation for markets' summer slump and rapid rebound lies neither with rates nor with the economy
  • It sits - yet again - squarely with swings in central bank liquidity
  • While the resilience of fund flows and cutting of leveraged positions is somewhat reassuring, on balance we still see the support as temporary
cb liquidity vs spx rolling 7d

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Should you believe the bounce?

  • Attempting to explain the market bounce in terms of economic data fails to do justice to the prior sell-off
  • Flows & liquidity indicators once again shed light on the moves
  • On balance they leave us skeptical

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Mind the exits

  • The increase in VaR is sparking a broad-based, and potentially indiscriminate, unwinding of leveraged positions
  • The first question is which other leveraged positions are at risk
  • The second question is whether fund flows will hold up
  • Central bank rescue easing or liquidity packages are likely only with a much bigger sell-off or more obvious signs of systemic leveraged distress

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What rotation can’t cure

  • The violent rotation in equities is sparking hopes of a fundamentally-driven rally
  • It has been aided by record fund inflows and a spike in CB liquidity
  • But the details of both the flows and the liquidity leave us skeptical
  • Expect the rotation to continue, but not the rally

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Free clip: Who pulled the plug?

  • Free clip from first ten minutes of 3 July webinar
  • Even as the rally continues, it does so on ever more fragile foundations
  • The problem lies neither with the economy, nor with central banks being slow to lower rates, nor even with politics
  • It is that the liquidity which fuelled markets in H1 looks increasingly likely to be turned off
market has momentum webinar replay screenshot

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Did someone pull the plug? (free to view)

  • Recent softness in risk is not just the fault of France
  • The underlying drivers of the rally have been faltering
  • The outlook for H2 just darkened considerably
Did someone pull the plug presentation cover

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When star stands for confusion

  • Recent statements are a reminder of the importance of neutral rates for policymakers
  • But they also illustrate confusion - not only about the level of r*, but even as to what it is supposed to be measuring
  • At the heart of the confusion lies a failure to distinguish between the impact of balance sheet on markets, and of rates on the economy
  • This potentially leads to very different conclusions for r* and policy
r-star down, return on capital up

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Seven lessons from complexity

  • Markets and economies should be analyzed as 'complex systems'
  • Their fat tails and emergent behaviours fit poorly with traditional linear economics, but very well with complexity modelling techniques
  • Lessons from other complex arenas apply equally well to investing
Under conventional economics, volatility shouldn't form clusters - but it does

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Short-term exuberance alert

  • 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
trailing 12m cb liquidity down, equities up

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The asymmetric Fed

  • 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.
cash assets at small and large us banks still far from 2019 lows

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