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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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Free replay clip: Why are financial conditions so benign?

  • 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
- Markets seem abnormally exuberant - It's not just the stronger economy - It's the impact of easy money

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Cliff notes on credit

  • 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
ccc-b spread differential ratio to hy index spreads at record highs

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When crowding stops, markets drop

  • 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
fund flows vs cb liquidity

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