Macro Update – 03/24/2025 – Guest: Capital Flows

[00:00:00.07] - Speaker 1
Sa.

[00:00:38.29] - Speaker 2
Welcome team and happy Monday. Excited to be here with the Tim and with Jeremiah from Capital Flows. Very excited to have you. I think is the second time we have this session with you. Like we last time was maybe a few months ago. So very, very happy to have you back and welcome.

[00:01:00.16] - Speaker 3
Yeah, happy to be here. Excited about it.

[00:01:03.17] - Speaker 1
Yeah. Good morning from me as well. Deal followers and listeners and yeah, it's the second time we have met in December already. Last time we it up with the technical issues because we are some sort of boomers, I guess, but we are here in life and yeah, we did it. We did it. That's right.

[00:01:26.02] - Speaker 3
I love it guys. I like it.

[00:01:28.05] - Speaker 1
Nice. Yeah. I think you are done, Fabio with everything. Yep.

[00:01:34.05] - Speaker 2
Take it away.

[00:01:35.20] - Speaker 1
Then let's get into business. The fellow listener knows how this stuff works. Usually we make a little bit of a presentation, but yeah. Has happened in the markets the last week. What can probably will happen over the next week. Usually we pitch a trade as well if there is something to talk about it. Just a small reminder. Look at Copper now. Right. We told you last week, didn't we? And today is a little bit different. I have a few slides prepared. We have Jeremiah here. I don't know man, if you are watching working like 48 hours a day, but the stuff you are doing is yeah, pretty amazing from my side. I have to be honest here. I'm also a subscriber of your substack, so used to your work and today we want to talk to the people how we. How you are watching the current environment. Right? Yeah, absolutely. If there are questions, just found them in the chat. We keep it crisp and yeah, around under hour, I guess. And yeah, let's start it. Yeah, first slide if you want to follow the work of Jeremiah substack capital flows on the X as well.

[00:02:59.23] - Speaker 1
Okay, so where do we start? Obviously there's a lot of talking about the most recent developments in the US Markets. Right. Let's start with something a various of people are talking about which are tariffs. Have you been surprised by that? Yo, can you hear me?

[00:03:33.25] - Speaker 3
I'm sorry, what was the. What?

[00:03:35.08] - Speaker 1
Oh, yeah, yeah.

[00:03:36.12] - Speaker 3
Have you.

[00:03:36.23] - Speaker 1
Have you been surprised by the market. By the market reaction and how this whole theme have built up from Donald Trump.

[00:03:49.20] - Speaker 3
Yeah, so I think the very interesting thing on the tariff side is there was obviously a big impact at first and we, you know, saw it move markets especially, you know, with the combination of the tariff and then also the deep seek news and things like that. So I think on the tariff side it's It's a little interesting because it's, it's not evenly distributed in my view. So you have, you know, obviously tariff tariffs on aluminum that have risen a bit and then you have the potential for the full scale implementation of tariffs across Canada and Mexico. The deadline still seems to be April 2, but we haven't seen that, you know, fully come through yet. I think they're going to come, but the deadline gets shifted around a little bit and then there's this kind of question of okay, how much are tariffs going to be? How much are any reciprocal tariffs going to cause and take place? Because we already have some tariffs on China, how are those going to spread across which products? And so that's part of the reason why markets have been a little uncertain about it on the front side.

[00:05:10.16] - Speaker 3
And then also just the fact that a lot of companies have pulled forward their spending and importing of goods in order to lower that risk so they can just kind of store up some inventories and front load, you know, some of their actions. So what I would say now is that any of the tariff news is pretty clearly not impacting price as much as it was two months ago.

[00:05:35.03] - Speaker 1
Yeah.

[00:05:35.29] - Speaker 3
And so, you know, on the tariff side, I think we, you know, we'll, we'll have it still impact, you know, if you actually have a, a tariff imposed on Canada that can actually pretty seriously impact them. And then same on the Eurozone, if you have a pretty significant change in automobiles or things like that that could fuel things in terms of inflation or whatever that might be. But the interesting thing in my view is you have this happening at the same time as, you know, central banks are shifting as well. Right. So, you know, I'm, you know, we don't know how it's going to all play out, but it seems like a little bit of a perfect storm because you, you know, have some central banks like the ECB or whoever, whoever else might be, you know, beginning to shift their stance, you know, even the, even the more recently beginning to shift their stance even in light of the, the changes. And you even see Powell and SCP note more of a stagflationary view for how the US is likely to play out over the next, you know, two, three, you know, four months, over the next three, four months.

[00:06:51.16] - Speaker 1
The timing on this is a little bit odd, at least in my view because basically we are starting or we are in a global cutting cycle from the central banks. Except Japan. But, well, Japan does what Japan wants to do always. But yeah, the use cutting Australia as well. The Fed as well. And then you have Donald Trump into the office and he immediately starts with, yeah, tariff, let's call it negotiations. Right. People always try to label it as a war, but from my view it's, I don't know, it's something like a card game because it's, it puts the US a little bit in a, in a position where they can negotiate a little bit better with their peers in the world. Okay. So, and what's, what's really interesting to me was the FX market volatility has gone through the roof. Right. The last two, two and a half years it was pretty, pretty calm. Trading fx and with all the tariff stuff in like January and February, it was so chaotic. Amazing. And the timing on this was a little bit unlucky, I would say, because it spooked markets.

[00:08:11.03] - Speaker 3
Right, right. Yeah, I agree. I think, you know, you have, you know, a Treasury Secretary who is clearly, you know, coming on national television pretty consistently and you know, beginning to, you know, he did his interviews with the all in podcast. You have, you know, some of the other members of the Trump administration who are pretty high level people, you know, begin to do more interviews and have more of a public facing presence. And you were, you were seeing that they're not just trying to push a policy through or change something, but they're really trying to talk the market in a certain direction and change the entire narrative on every level. From a taxpayer perspective, from a market perspective, from the business perspective and everything like that. They're trying to introduce intentionally some uncertainty, some shifts, because they know that they have to steer the ship in another direction. It's just that analogy, if you are taking some type of, you know, warship, wherever that might be, you know, typically you're turning it really slowly when you're in the ocean. Right. But if need be, you could turn it a bit faster. You just have to expect for some stuff to fall off the side.

[00:09:34.05] - Speaker 3
Right. Or some things to start falling apart.

[00:09:36.22] - Speaker 1
Yeah. And I think that's what we have seen like the last month. Right. Yeah.

[00:09:42.08] - Speaker 3
So I think, I think that, you know, policy always creates the best opportunity for trades and for, you know, changes in how the economy is going to work. Right. You know, I think, you know, a changes in policy that are indiscriminate of if the market goes up or down. Right. You know, changes in policy that are going to happen irrespective of whatever outcome might take place. You know, those are things that really set things up for excellent trades. And you know, a lot of times if there's complacency moving in which we're actually seeing in some places right now. You know you, you get some pretty significant blows out blowout and volatility, you know, which catches people off sides.

[00:10:30.22] - Speaker 1
That's always, and that's always a little bit of front loading of the actual event. Like people are a little bit spooked on the technical side as you have said already, they may face a higher regime of volatility and they are not used to it or not prepared to it. Right. That's always a little bit some uncertainty for them. And from my view it always gives you sometimes really, really interesting correlations in the markets. I mean if you look at DEs and crude over the last weeks, it kind of moved in lockstep, right. Global growth scare is a little bit more downside ish for oil prices. U S stocks have been sold no brainer here. On the other hand, bonds had a little bit of a risk of bit to the upside, right. Because people tend to height in those, let's say boring assets, especially the long end. And if you can map this out a little bit and you are the opinion well that's a little bit, that's a little bit too much, right. For risk as it's going down. It can give you tremendous trades like bonds. Because what has changed in the bond market like the last two or three weeks that we have an ongoing big long trend right now, especially after the last fomc.

[00:12:07.27] - Speaker 1
My opinion here.

[00:12:11.15] - Speaker 3
Yeah, I think, you know, the ES strategy that I run and publish on the substack had begin to, you know, shift its stance and you know, actually as of Friday's close, you know, ran some longs and flipped a little bit from, you know, from its, you know, more we. It was basically, you know, shifting to more neutral over the last, you know, week or so because it was short for a little bit and then you know, began to you know, run some longs which is, you know, the, the, the gap up that we're seeing today in es not surprised. You know I think that that makes total sense is very likely to take place especially as we have all of these shifts. But in terms of bonds, the stock bond correlation, if you are trying to trade equities, if you're trying to have any view on single names in this environment. One of the best things that you can be watching for a clear view into that are interest rates and how the long bond is moving. Because the actions of the Fed right now are going to have an input into how growth and inflation are going to play out.

[00:13:22.26] - Speaker 3
Ultimately and that's going to impact the long bond. So you see today, equities up a little bit, bonds down a little bit. You have a bit of position and wine. In my view, it's going to be tough to price more than 75 basis points for cuts in 2025. So this is the Z5 SOFR contract. And for people who are new or know, don't know that as much. All we're saying is, you know, there are derivative contracts that price the speed of rate cuts and the amount of rate cuts that the Fed will do in a, any period of time. And right now, you know the market, you know the market was pricing 75 basis points for the entire of 2025. Now that's coming back down a little bit. I think we'll fluctuate between 75 and 50.

[00:14:09.18] - Speaker 1
Yeah, it's always, it's always those ranges that you can draw out with the percentages.

[00:14:15.08] - Speaker 3
Totally. Yeah, yeah. So I think that's what, I think that's what we'll, you know, see. I think the 2026 contract will stay above that FOMC level or just you know, approximately around those levels and you know, we'll see how exactly it plays out. But I think, you know, the, the period of time that we're in right now watching those two contracts is basically going to frame which way equities are going because they're so interconnected. So that, you know, that's my view here. I think, you know, I think we'll see a bit of a bounce. That's not really the question. I think we all, everyone kind of every, anyone who trades, anyone who's running an algo, I mean even the systematic and discretionary side, it doesn't really matter. Everyone knew there was going to be a bounce. Everyone can, you know, kind of throw out all whatever views they want, but everyone knows when you're this oversold, this, these much changes involved, you're gonna have a bounce.

[00:15:10.12] - Speaker 1
Then you have always the soft data stuff that you get sold by Bloomberg or something else like AAI sentiment, blah, blah, oh it's bearish the most since three years and yeah, and on the other hand it's very, very common since a few years to talk about OPEX and about options expirations, especially the big ones every month or right last week quarterly. And I think it's also a little bit of a self fulfilling narrative because even if the people are not very proficient in the option space and can't, can't explain the drivers behind it, they are like wow, it's OPEX and everyone was bearish. And if this stuff is getting priced out in terms of Gamma, the market, we have to bounce, right?

[00:16:06.03] - Speaker 3
Yeah, yeah, absolutely. I mean I think what, you know, I was actually talking with the other, other individual on my team who, I mean we're both trading a lot and we're both, you know, running a lot of models and things like that. But you know, both of us know that, you know, over the past, let's just say four or five years, the amount of front running that you have into Catalyst has changed just to a pretty significant degree. You know, it used to be, you know, the, when you have a catalyst like cpi, opex, whatever it might be, it would, you know, pretty clearly set highs and lows or things like that. Now you really see those happening sometimes five days before the actual catalyst, you know, like cpi. Right. You see positioning get set up.

[00:16:57.23] - Speaker 1
Yeah.

[00:16:59.08] - Speaker 3
You know, even FOMC getting things set up five or six days before the E catalyst even takes place. And then you see a little bit of mean reversion into the catalyst and then an unwind after, you know, so use. Everyone knows that everyone has been trading these catalysts a lot more. If you look at OPEX through 2020 and 2021, you know, it basically set every bottom and every dip that took place. Right, right.

[00:17:21.17] - Speaker 1
Yeah. But the majority of people wasn't that aware of it.

[00:17:25.06] - Speaker 3
I say yeah, and then. Yeah, exactly. So you less people are aware, it had a bigger impact and now a lot more people are aware for that. And then also, you know, I mean everyone knows there's a lot more calendars going around. There's a lot more insight for, you know, the week ahead. That didn't even exist a couple years ago. Maybe only in, you know, I know, you know, we always did it when we were trading and things like that. But you know, you always have meetings and go through what is things look like ahead. But I think in you know, broad sentiment terms it wasn't as popular. So I think, you know, you have a lot more focus on and you know, more tools and things like that where people are much more aware and that is, you know, I think more on the institutional side it is very clear how people are, you know, getting set up into these things. And I mean we've built models on just how these data prints can come out and what those look like. I don't spend a ton of time on them because a lot of them are very coin flippy.

[00:18:22.15] - Speaker 3
Even if you have a really good model, there's some pretty Sophisticated models you can build in machine learning and on the quant side by feeding in a bunch of data points and trying to figure out what variants you have for the next CPI print and where exactly consensus is coming in correct in connection with that. So, you know, there's, there's a lot of very interesting changes that we've seen and it's, it is tangibly impacting markets.

[00:18:52.10] - Speaker 1
So then let's go over to the next one that we have here. I labeled as, yeah, us versus rest of the world. You mentioned it like a few minutes ago already that we have significant outperformance. So the question is now here, people then like to think about this. What, what has material changed, right, in the US the last slide had some headlines from Bloomberg and Wall Street Journal and all this stuff. I just put them in there to try to capture what media always wants you to know or to believe. And then you read recession, right? And surprisingly, most of the people are like perma bears all the time. They want the stock market to go down. I don't know why I'm a perma bull actually, but doesn't matter. Recession. Yes. No. What do you think about it? It's stupid, isn't it?

[00:19:59.16] - Speaker 3
I think we are seeing, you know, you know, I actually, I actually have interesting opinions about this. I wonder, you know, how much of all of the, you know, bear porn that we see on Twitter and everywhere else, how much of it is just a psyops that asset managers can just keep buying. You know, like if, if, if in 10 years, I would not be surprised if we found out that like a lot of perma bear accounts were just run by some allocators. I don't know.

[00:20:28.03] - Speaker 1
But you know, it's very interesting.

[00:20:31.19] - Speaker 3
It would just, you would look at it and you'd be like, oh, that makes sense, right. But you know, we don't, we don't know, 100%. I think it's easy, it's always easy to poke holes in things because fear always sells. And the thing that is more difficult to sell is how conviction and action should take place. And that is, you know, when I look at how things are playing out, you know, my view is, yes, you have a little bit of a driver on the growth side for equities. You have a little bit of a, you know, softening in growth, bonds have rallied a bit. But if we look at the underlying evidence in the data, fundamentally the pullback that we've seen in US equities is directly connected to the rally that we have seen in Chinese Stocks and European stocks, especially in tech and in banking. Right. So you're seeing in China a lot of money shift out of US semis, US tech, you know, SaaS. Regardless of what people say. People have all their narratives. But you know, SAS is getting destroyed by AI right now. Right. You have had this entire industry where the main edge is a really nice user interface and some basic software management skills.

[00:22:01.13] - Speaker 3
And now you have AI come in and it can do 80% of that job. Right. And you have all these developers coming in who are coding nonstop and then you just supercharged them and now they're doing projects in 24 hours.

[00:22:16.29] - Speaker 1
Right.

[00:22:18.03] - Speaker 3
And so the entire SaaS industry is getting compressed. I mean I just think about how the way that we build models has shifted. There's still the same problems that we face in terms of what type of inputs are we going to use, how do we use lookbacks, how do we think about predictability, how do we make sure we don't overfit and things like that. But we're going way faster now. Like it's a, it's significant and I mean the main reason is, you know, we have something that helps us code now. We have, you know, just the ability to just move through the same process that we had. Faster has just dramatically changed.

[00:22:58.13] - Speaker 1
Yeah, I mean it's like 100 or 120 years ago, right. Someone invented the combustion engine. It was cool, but it was not that reliable. Like two years or four years later some someone invented a more sophisticated one of the original invitation and stuff is going better. And that, that's kind of the point that you are mentioned with AI that is, yeah, growing faster still like two years, but it's getting more efficient, right?

[00:23:32.04] - Speaker 3
Yeah. I think we are seeing this in markets, right. I think you're seeing a rotation, you know, from the US side all the way to, you know, some Euro stocks and then, you know, especially German banks. And then you also have, you know, the exposure put up in China. And the reason why is on the AI side, I mean, you know, I've even used a lot of stuff with Deep Seq and I've run some, you know, things with that that are very interesting. But on the AI side a lot of it is in a sense a winner take all effect. Right. There is that element there. People are saying, well no, it's going to be evenly balanced and everyone have their specialty. Technology is always a winner take all monopoly effect. So when we think about the changes that are taking place in AI right now, the most important thing that you can Be doing is, is understand how that is is functioning because you just think about if you have a winner take all effect in the AI space and it's deep seek over chatgpt and deep seq becomes the AI for the entire world.

[00:24:47.03] - Speaker 3
How does that change the geopolitical position of China? Right. That is significant.

[00:24:53.20] - Speaker 1
Right. It's a, it's an advantage, a big one, huge advantage.

[00:24:57.20] - Speaker 3
So you know, we'll see how it plays out. You know, that's not really what I'm predicting but the market is definitely pricing the probability because you wouldn't have the rotation that you're having without that. And so, you know, we're likely to see some more upside in Chinese equities. But I will say, you know, a lot of, you know, you have call skew blowing out in Chinese equities a bit right now. Not as much as previously, but you're still having it pretty elevated. And you have a lot more hedge funds that are in the long China trade, even if it's with, you know, some type of, you know, options men or whatever else that might be. You know, I think when you have the head of Soros, you know, come on, you know, Bloomberg and talk about, you know, their long China trade, you know, that's, that's, that's a signal just at least in a positioning sense that you know, when someone's talking their book like that, that that's big, you know, be careful just buying the high but you know, you know, be aware of that because you know every hedge fund is always going to try to talk their book to try to dump their bags and get liquidity.

[00:26:00.23] - Speaker 3
But you know, I, I think, you know, you have a very noticeable shift that you need to monitor especially for price action in equities.

[00:26:10.03] - Speaker 1
Yeah. Wasn't, wasn't it David Tepper like a month ago that he is up to the tits longer in China and the presenter was asking him do you use a stop or something like that? And his answer was my stop is being long China actually. So yeah, I mean, I mean those guys, I have big books, right. And if they are talking about it, they are usually in the trades like a few months or a few weeks at least. So don't be surprised if they talking about this stuff in public. It's yeah some sort of PR for them. But it's actually a good point because you mentioned the underlying fundamental drivers of this. But from my perspective there's always a technical driver of those markets. Think about people have under allocations in Chinese big names or the big caps Some might even be short because it was kind of a crowded trade the last two years. Right. Being long US tech and the counter part of your trade be short on the Chinese tech ones. Yep. So this yeah maybe will shift. And you have always people even in high finance or big finance, they are late.

[00:27:31.17] - Speaker 1
They are late in adaption to the trades and they maybe have to flip as well. And this stuff usually feels upside. Right. So everything US in your book, yours, yours, out, out and everything that you can allocate in China, even if it's already expensive trade because of. Yeah. Volatility is blowing up and SKUs are already priced pretty significant. You want to write this like for the next few weeks or months to have your returns over there. Right. So that's pretty interesting. That's the reason why I built this little chart down there. There's a European Union defense ETF and actually we pitch a trade like in the beginning of February. I guess it's kind of the same. People have been underweight those stocks the last few years. They beat it. The EU stocks down because the EU sucks usually and the US outperforms. But this is shifting as well. And on top of it you have government spending. Right. Debt ceiling debate in the EU was a big thing and also the whole war thingy. So main take over here stuff can escalate pretty quickly if people are underweight. If people have the opposite trade, which is a short and then the story might change fundamentally.

[00:29:14.17] - Speaker 1
So yeah, that's the main point behind this. US rest of the world slide over here. And my favorite market always softball and short term interest rates. So I think you have already mentioned that we are trading kind of the FMC levels from last week. What do you think Powell wants to told us last week? Is it over or are we back or neutral?

[00:29:49.09] - Speaker 3
I mean, you know, I think for, you know, Powell, you know, overall kept a pretty balanced stance. I think the TGA and the QT news was, you know, broadly speaking, priced in. We're not seeing that much of a change. I just think the question is, you know, we've seen a pretty significant fall in rates. The question is, is that going to cause some inflation and then bear steepening in the curve, you know, with crude higher. So I think that will be the question of, you know, all of this. Right. One of the things that I've, you know, laid out on the sub stack is, you know, watching these ranges between 25 and. Or, excuse me, between the, the Z5 and Z6 sofa contract, you know. Yeah. You know, watch, watching those in Connection with how the curve is steepening and how crude is moving. That's going to determine equities and everything else. Right. And that's what we're, we're actually seeing today. We're seeing you have, you know, the long end down a little bit more, you have some bear steepening and then you have, you know, crude up on the day. You're having a little bit of an unwind with the equity gap up, you know, as, as people put some exposure back up, you know, in my view for es, probably going to be tough to make a durable close above the 5,900 without some type of pullback or test.

[00:31:11.27] - Speaker 3
And that's really what we're going to, you know, when we're going to see a true test of the, the trend. You know, in my view, just given the change in the geopolitical macro environment and just based on momentum, you're going to have a much higher hurdle just to move back up to all time highs. I wouldn't expect a direct straight line in equities.

[00:31:38.02] - Speaker 1
Yeah, that's true. I mean, I don't know if we have much day traders here in the community watching right now. Liquidity is awful in futures, isn't it? It's like multiple years. It takes a dollar and a dime to move es basically. And that's a little bit funny to me because it shows you actually how many people want to participate in the markets. Right. You have systematics like CTAs. They have been sellers the last two months it was not that much but it was significantly big. Right. And with expanding daily ranges and expanding volatility as well, the market gets usually a little bit. Yeah, illiquid. Right. And I always watch it in the stance like do people want to have exposure right now or do they don't want to have exposure? I don't know if you watching liquidity in terms of bid, ask in your models.

[00:32:48.08] - Speaker 3
Yeah, So I do take into account intraday changes and liquidity and things along those lines, especially in the order book. You know, if you've ever watched an order book just through regular session, you know, you see the orders come in and out, you see the changes all up and down the book. And I think, you know, we have had a shift in how execution liquidity works. I think what we're seeing is a lot more. In the past you had a lot more limit orders, right. That would rest in the book and wait for their fill. And a lot more today are alos executing at market. Right. So you know, in my view that's why you have more reversals and that's also why you have more players in the zero dte space. You know, either hedging their risk and executing so that they're hedged, but you're seeing more market impact on an intraday basis. Right. That's why the characteristics of price action on an intraday basis have shifted a bit. You know, combination of liquidity and then also combination of, you know, option flow. Yeah, I will say, in my view, I don't know. You know, I don't, I don't necessarily think that, you know, I think the badass spread is important to watch.

[00:34:06.12] - Speaker 3
I watch all the time. But I think a lot more people, you know, the, the same liquidity isn't there in the market, but I think you have people step in, right. So even if they're not letting their orders rest in a book, it's now just an execution algo that they turn on and off. And so that's, you know, that's how I think about that. Where I don't think it's necessarily that there's just no buyers anymore. You know, I think we have this perpetual bid for passive and things like that. But you know, it's, it's the, the entire setup is really focused on how exactly is this hurdle of time, right. Going to, you know, implement how far price action go just for people to get their fill. So I, that's how I think about it. And I think you have a lot more. What, what's the tangible implication of that? The tangible implication is that if you look at daily and weekly closes, you'll see a lot more intraday and intra week variance. Right. You'll see the, the price now move to extremes on an intraday basis more and then reverse right away.

[00:35:21.06] - Speaker 1
Right.

[00:35:21.16] - Speaker 3
You'll see a lot more. And that, you know, creates opportunity if you know how to manage those different flows. And then if you are trying to dig into more of that, you know, what I would say is just model standard deviations across different sessions of time and where mean reversion typically occurs after a certain standard deviation range on an intraday basis or a weekly basis. And even if you're not going to get something that is, you know, really high sharp strategy, you're going to be able to see where extremes and tops and bottoms begin to take place.

[00:35:58.22] - Speaker 1
Yeah, you always have to fetch your process a little bit, right. To keep up with markets. Markets are changing. That's. Yeah. Nothing new to you and nothing new to me, but maybe it's a little bit new to our Listeners. And what's also important and not really that much people are talking about, at least in. Yeah, my bubble are weekly levels or weekly standard deviations, especially in stuff like ES&Q. That's something I would encourage you people to watch a little bit more. Right. Zoom out the, the. There's so much noise, especially if you participating intraday. Right. So main takeaway, zoom out a little bit and yeah. Watch the broader picture. And yeah, because we still have to suffer slide open, it sounds like trading spreads, right. Not directional moves outright. Do you agree? What was the, what was, was the question? Because we have the suffer slide open, it's maybe wise to trade more spreads like set five 25 and set 26. Right?

[00:37:17.10] - Speaker 3
Yeah. I mean, when I think about spreads or directional trades, I think you have different risks and hurdles for each. So, you know, I have a model that just b. I mean, you know, I think most people have this type of model, but you know, just it shows where exactly optimal risk reward exists for directionality versus spreads. Right. So, you know, for. Generally speaking, first you want to start with, okay, where is my directionality risk reward and confirmation and changes and how can I model that? And then from there say, is there a better risk reward? You know, because, you know, a spread, you're always going to, you know, you're always going to take some type of directionality in some way.

[00:38:02.23] - Speaker 1
Right.

[00:38:03.04] - Speaker 3
You know, a lot of times you're going to have some type of beta to your assets. You know, people are going to say that you're, you're not taking a directional view or something like that. You know, implicitly in any spread, you're taking some type of directional view. And so, you know, that is, you know, something important to think about. And I think when you have the type of range you have in the curve right now, you know, the, the spreads are just absolutely critical to be monitoring at the very least for an intraday basis. And then the same thing with equities. I mean, there's a reason why you, you know, have the Russell up more than the Dow. Right. And there's a reason why you're having these changes. I would actually be watching. I mean, I don't think people have, you know, caught on to the changes in the, the Topex in Japan and how you have that rallying pretty significantly. That's kind of like the Russell of Japan. And you know, that especially in the Asia session, if that begins outperforming the Nikkei, I'd be watching, you know, for the Russell to outperform the Dow A little bit as you kind of move.

[00:39:15.14] - Speaker 3
So I'd be watching those spreads and that's a. You know, if that's happening, if you have the Russell outperforming, you know es, then you're probably going to have some type of bear steepening in the yield curve because you're having like small caps rally in the the market price a little bit higher growth expectations on a relative basis, if that makes sense.

[00:39:38.04] - Speaker 1
Yeah, small caps always worth to watch. What I also like to watch is the Arc etf. Right. Positioning is over there because it's such a dean asset. Right. It's so worse but it performs really, really good if people are ready to take more risk on and yeah. More exposure and stuff that it's usually labeled as unprofit, unprofitable tech and something like that.

[00:40:06.05] - Speaker 3
Yeah, agree.

[00:40:07.16] - Speaker 1
So yeah, and macro stuff. The infamous Atlanta fed GBT now print it shows or it showed last week minus 2.8 which obviously would mean. Yeah, the whole US is falling apart a little bit on color of that. That's due to. Yeah. This model is being calculated. Right. It always have new implications and will always update it if several points are coming out like retail sales or all that stuff. But I have seen a lot of talking about this so. But there is no reason to worry. Right?

[00:40:56.29] - Speaker 3
Yeah. You know, so we run, you know, we look at the Atlanta Fed now cast always. We look at the Bloomberg Nowcast and then you know, I have multiple now casts that I'm looking at at all, you know, points in time that have different sensitivities to parts of the economy and that are, you know, trying to. To map gdp. When we look at things on a broad basis, you know, we know, I mean any anyone in the industry knows that, you know, the Atlanta Atlanta Fed Nowcast is predicting a negative real GDP print which is just unlikely to actually be realized. Why is that? It's because personal consumption expenditures and the main consumption line items still remain positive. Investment remains positive. We saw housing data come in above expectations the other day. We're seeing the major things that are causing that move down are from the most volatile components that have the smallest weighting. Right. And that just goes to show you, I mean the Atlanta Fed now cast is nice and it's helpful. You kind of have to know where exactly it's not helpful which is this period of time. Right. So I think overall, you know, we are not seeing the signs of an imminent recession and the setup where you would want to be, you know, if a recession is happening, if a recession is imminent.

[00:42:25.05] - Speaker 3
You want to be short equities with size. And so that's not taking place right now, which is a pretty significant implication.

[00:42:35.00] - Speaker 1
Right.

[00:42:35.22] - Speaker 3
And so when a recession is happening, you see a, a large change. Right. Like that's actual underlying deterioration that's taking place. We're not seeing that right now. And so that is an important distinction to make because part of the unwind in equities that you know, is taking place today and also on the curve just a little bit, just on a marginal basis before we have the next, you know, move, you know, that's, that's recessionary positioning getting, you know, washed out. Because it's getting too aggressive.

[00:43:08.21] - Speaker 1
Exactly. That's the stuff we have talking about like yeah, 30 minutes ago that people try to front run stuff or getting out, bailing out of positions. Yeah. Because it feels a little bit edgy and dodgy. And what I'm always encouraging people to watch is obviously credit markets. This chart down here, it's the option adjusted spread for high yield credit bonds for the US market. It's a technical spread built by the bank of America. Right. And you may seen stuff the last weeks that this spread is up like XYZ basis points and this is the highest steepening since a few months.

[00:43:57.18] - Speaker 3
Be.

[00:43:57.26] - Speaker 1
A little bit smarter than everyone, just pound a rate of change below it a little bit. And you can see that those rate of changes have been present also in 2223 where we have higher inflation, central banks, hiking rates, all this stuff. And the world wasn't falling apart back then. Right. Especially in the US we had tremendous years. Two of them are with returns very unusual over a historical time. So I think we can agree that this indicator here. Well, it's not an indicator, it's yeah. A spread for high yield credit markets. But it's important to watch. But you can not say, because this stuff is moving, something bad will happen, Right?

[00:44:53.23] - Speaker 3
Yeah, exactly. I mean, yeah, I think when you look at that, that's a direct input into equities and things like that. You just have to say what is that being driven by? Right. Because in 2022 that was primarily driven by the hiking cycle, even though nominal GDP was really elevated. Right. And real growth was positive. So it depends on what the drivers are and how you're analyzing those correctly. And right now we're not seeing a significant change in the underlying drivers that would indicate a complete collapse in growth. Right. We're just not. So that, you know, I think the, the question will be are credit spreads going to mean revert all the way back down to their lows and their cycle lows or are we going to have them moderate here at an elevated level? The best things that you could have for the bond long is credit spreads to just stay at these levels and not mean revert back down.

[00:45:55.05] - Speaker 1
No. Right.

[00:45:55.17] - Speaker 3
Because if, if credit spreads move all the way back down to their lows, you're probably going to have the long end sell off and inflation re accelerate marginally.

[00:46:03.29] - Speaker 1
Yeah. Because why would you have exposure in the long enough bonds if the spread is moving down? Right. If there are other places where you can have a bigger education that delivers you more returns.

[00:46:15.22] - Speaker 3
Right, exactly. Yeah.

[00:46:17.16] - Speaker 1
I just, I just like to bring this stuff up because you read it all across the board. You, you know, social media this year, it's spreading like a wildfire and all those people that have so, so many bad takes about this stuff. So it's always a little bit nice to. Yeah. Tidy up here and talk about it how it really is. So. Did I forget something? No. Yeah, last slide. This is more something I, I hate the word mindset, but it is kind of thinking about markets. What has changed in the last, let's say two years in your process? Do you have made bigger changes or is it, yeah. Harder to. You have a stance on the market navigating all the stuff?

[00:47:15.07] - Speaker 3
Yeah, it's a good question. I've laid out a lot of the big picture process that I implement for my views on the substack and I share those every day there. The way that I would say my process has changed is that it has been refined a lot. The fundamental presuppositions have not shifted in my view. I think the quantitative rigor and the implementation of that has changed, or I would say it has improved as opposed to change. It's been refined. So, you know, I, I think, you know, in, in today's world, you have a lot more tools that are being used. And I think the combination of what we see with artificial intelligence, deep learning, AI, machine learning, all that stuff, you have a lot more tools to be able to use for identifying relationships and building models. You also have millions of ways now to screw up. If you don't actually know how things work, you now have greater tools available. And I mean they've always been, they've always been available, but broadly speaking, you have a lot of tools available, but you have just more and more ways to go astray. And so, you know, a lot of, a lot of times what I see is a lot of misunderstandings about, you know, thinking clearly Right.

[00:48:58.23] - Speaker 3
And, you know, if anytime I approach any, you know, building any model or trying to make any conclusion about markets, I know that there's, you know, functionally, you know, 90 to 95% of the ways that I could build this model or take this view can be wrong. Right? So just because I talk about a specific data point or break down a specific idea. Right. That in itself is not enough. I actually have to have. There's a higher hurdle rate today where it's not just about having the data. Everyone has the data now. It's not just about identifying the relationships properly. Everyone kind of does that now. It's about pulling together every single detail of information, interpreting it correctly, which is much harder than it looks, and then implementing that with a correct risk management process. And I think, you see, I mean, that in itself is pretty difficult. It's also incredibly difficult to consistently extract the entire distribution of returns from that because you need to have a different time preference and risk tolerance than the market. So overall, I would say, I think there is so much opportunity for, you know, people coming into the market.

[00:50:22.14] - Speaker 3
You know, you have very competitive people that you're going up against, but there are just so many amazing things that you can use. I mean, just the fact that you have, you know, all these tools on Google Cloud that you can use, that you use now for machine learning and things like that that are. I'm not going to say they're free, but pretty close to it just for your average person to begin to find relationships and things like that. You know, there. There is just so much space. The entire question is, how is the quality of your thinking being refined so that you're going in the right direction? And I would say my process, the things that I'm reading and the conversations that I'm having are all focused around that because now I can get things spun up pretty fast in terms of like an idea. I can model it out, figure that out. We put it through the testing process that we have. There's some things that take a while, but we have a pretty clear process. And now it's all just about the quality of ideas. And so I think you just want to get to a place where you're like that, where the factory's built and now you're just running the ideas that you have.

[00:51:36.22] - Speaker 1
I mean, I'm still in the camp. Reading a book is good for you. I don't. I know it's a concept for many people. Pretty new reading books, actually. But out of these books you can have ideas, you can have Knowledge. And yeah, with the tools you mentioned, be it AI or whatever or language learning model or something else, you can build much faster actually trading ideas, Right? I mean. Oh, I would say that's. That. That's a good point.

[00:52:06.08] - Speaker 3
I think you have to remember the fundamental presuppositions of how reality works in that we are operating in a world where we are exchanging goods and services. Which means if you are exchanging goods and services with other people, your differentiation and skill set is relative to the other value people are providing, which means that, you know, your ability to think clearly and to make decisions is directly influenced by taking difficulty that other people aren't taking. So, you know, very simple example. If you read a book, you have some type of, you know, theoretical edge over someone that has not done that. Right. And you can talk about, should I be reading books or reports or data or whatever it might be, but if you are embracing difficulty in a manner that other people aren't, you know, by definition, you are beginning to extract and identify things that are scarce and harder to access. Because everyone is always chasing comfort and trying to get away from difficulty. That's why they have the market, so that they can warehouse their risk and they don't need that difficulty. So if you're trying to run from difficulty and challenge, you're basically never going to be successful, especially in markets.

[00:53:30.17] - Speaker 3
Right. You know, the. The most important thing that you can do is identify where exactly you can embrace maximum difficulty, develop a specialized skill set that you can monetize and leverage consistently. Because if, you know, you just have to remember that, yeah, you can, you know, do things that are hard or whatever that might be. But there are other people that are just as ruthless.

[00:53:58.22] - Speaker 1
Right.

[00:53:59.02] - Speaker 3
And just as smart. Right. And you're competing against them.

[00:54:03.13] - Speaker 1
Right.

[00:54:03.22] - Speaker 3
You're not competing against the, the family members that you talk to at Thanksgiving or, you know, on holiday or. Yeah, yeah, you guys don't have Thanksgiving in Europe, but it's amazing holiday you get, right?

[00:54:15.19] - Speaker 1
You get to have it. No, no, something similar. But yeah, I was gonna say you.

[00:54:22.00] - Speaker 3
Guys have another holiday, but yeah, yeah, you know, it.

[00:54:26.12] - Speaker 1
The.

[00:54:26.22] - Speaker 3
The people that you're competing against are not the people that you're talking to for fun over, you know, the, the holiday dinner table. And they're just like, oh, you know, you, you trade in markets or you do crypto or something like that. That's not the competition. The competition is some, you know, nerd with a quant stack and he's, you know, ruthlessly working 247 and just.

[00:54:49.21] - Speaker 1
Just signals Just signals all the time.

[00:54:53.11] - Speaker 3
It's just important to know, you know, it's important to remember when you're approaching things.

[00:54:57.18] - Speaker 1
Yeah, yeah, pretty true. I mean it's a little bit important to. Yeah. Give a message to all the people because I think most of the listeners are in the retail space and yeah, the competition does not sleep, guys. Right. It's always a little bit of a grind. You have to put your work into it. And yeah, that's a little bit of the part where we are doing this, providing a little bit of insights and yeah, we have 55 minutes. I always try to keep it under one hour. And yeah, tremendous talk with you as always.

[00:55:38.19] - Speaker 3
Always a pleasure. I appreciate you guys having me on. It means a lot.

[00:55:41.23] - Speaker 1
Yeah, for sure, for sure. All good. And yeah, let's see what the week will bring us, right?

[00:55:49.25] - Speaker 3
Absolutely, absolutely. Look, yeah, looking forward to doing other with you guys on this and then looking forward to. To see what ends. Ends up, you know, getting hashed out in markets this week.

[00:56:02.27] - Speaker 1
Yeah, for sure. So no one has a question here in the comments, I guess. I don't know, guys. If there's anything. You have one or two minutes to pound it in. If not, I would say we release you into the pre open.

[00:56:21.11] - Speaker 2
Thank you so much, Jeremiah, for. For your time. This was awesome.

[00:56:24.24] - Speaker 3
We hope to see you very soon. Absolutely. I appreciate. Always. Pleasure.

[00:56:32.28] - Speaker 1
All right. Right.

[00:56:34.05] - Speaker 2
Thank you guys. Thank you, Tim, as always. And see you guys in the chat.

[00:56:39.17] - Speaker 1
Always then have a great week. Thanks for tuning in, Jeremiah. Huge thanks for you. Appreciate it and have a good one.