The credit cycle is in the process of shifting, and this is going to begin increasing volatility significantly
The most important thing you can do is be on the right side of the macro volatility
This 🧵is a breakdown of WHERE we we are and risks for markets
The primary place to start is HOW interest rates are impacting equities
You will notice that the bottom in real interest rates created the top in S&P500 market breadth. Why? Because when real rates begin to rise, it begins to contract liquidity. This begins to weigh on some sectors before others.
When real interest rates rise into unchanged growth, on net, it pulls capital BACK across the risk curve. This has been happening in the Goldman Sachs Mega Caps vs nonprofitable tech. In simple terms, when real rates rise and liquidity contracts, investors have less money to deploy and as a result they move capital into mega caps as opposed to nonprofitable tech on a relative basis.
What is the implication of this? It is one of rotation instead of a bear market. This falls directly into a tweet I fully agree with by @Citrini7 where the larger structure is not one of collapse but perma bears are extrapolating parts to the whole.
here’s a favored theory for what’s going on:
we are in an era of rolling bubbles. the entire market may not be, but at any one point there’s a few of them. for a while, staples were in a bubble - that unwound without issue. now, more classic/familiar bubbles have emerged in speculative areas like nuclear, DATs, bitcoin miners pivoting to AI etc.
that unwinding is seemingly getting a lot of attention, because it’s so popular with retail. at the same time, many sectors and leading companies are trading at very reasonable valuations. sub-bubbles popping while the overall trend remains intact is still my general thesis.
Its important to remember that we have seen a ton of steepener twist in the yield curve which is very different than the bull steepening during 2020 or 2008. The implication is that the driver has been higher nominal growth. While nominal growth is shifting marginally, the consumer balance sheet is still showing resilience even inspite of the auto loans delinquencies
The larger structural picture matters because it determines HOW HIGH we can go in valuations
Right now the S&P500 is at the highest valuation. One of the primary drivers behind this has been crossboarder flows as the US current account moves to record levels.
If you want to talk about imbalances, this is the largest in the world right now:
Many people feel safe because they are sitting on massive gains of wealth. The problem is that macro volatility always unwinds the beliefs people hold so dearly and assume are true.
The most important thing you can ask yourself right now is: "What important truths do very few people agree with you on?"
If you don't start here, the next 5 years are going to be very challenging. The macro regime is becoming leveraged to the currency and ALL risk assets are leveraged off of this. This is neither bullish or bearish but creates extreme scenarios in either direction where the currency devaluation or strength can cause assets (including Bitcoin!) to melt up or melt down.
For years people have viewed the Fed put as bullish for risk assets and the economy. Now that the economy has adjusted for this and created a massive trade imbalance, the currency is becoming the convergence point for everything. The only way forward is actively managing risk on the right side of the macro regime
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