Macro-To-Micro Power Hour: LEAP-ing Towards A Top?

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📺 In this episode of Macro-To-Micro Power Hour from 02/29/24, Samantha LaDuc and Craig Shapiro discuss the complexities of the current financial market, focusing on earnings season, inflation pressures, and the Federal Reserve’s potential responses. They delve into the nuanced impacts of macroeconomic data and central bank policies on market dynamics, including interest rates and inflation trends. The conversation also touches on the challenges of forecasting in a volatile market environment and the strategic considerations for investors navigating these conditions.

00:00:00 Introduction
00:01:30 Earnings Season Challenges and Focus
00:02:47 Inflationary Trends and Economic Data Analysis
00:05:35 Earnings Insights and Market Dynamics
00:09:17 Thematic Investments and Sector Divergence
00:12:47 Core Inflation and Policy Implications
00:16:27 Fed’s Strategy and Market Response
00:20:47 Fiscal Policies and Economic Impact
00:26:38 Financial Markets and Bond Trends
00:30:06 Corporate Financing and Investment Trends
00:33:36 Global Economic Factors and Risks
00:38:32 Market Sentiment and Inflation Concerns
00:42:14 Short Basket Performance and Equity Trends
00:46:22 International Policy Effects and Market Outlook
00:52:14 Fed’s Market Intervention Threshold

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💼 ABOUT US
Samantha LaDuc is the Founder of LaDucTrading.com and CIO at LaDuc Capital LLC. Samantha is known for timing major market inflection points in equities, commodities, bonds/rates, crypto, currencies, and especially volatility. As a Macro-to-Micro analyst, educator, and trader, Samantha makes her insights available to active traders and investors who want to minimize risk while seizing year-making opportunities.

Craig Shapiro is LaDucTrading’s Macro Advisor, primarily supporting our EDGE members. He acts as an outsourced macro consultant sharing his investment process and market thoughts while engaging with other macro-minded members interpreting the financial markets for the highest conviction trade ideas. Craig is a long/short cross-asset portfolio manager whose investment process combines bottoms-up industry and company fundamental analysis with a top-down macro framework. He has managed capital at some leading hedge funds, including Point 72 Asset Management, Ospraie Management, Graticule Asia Macro Advisors, and Circle Lane Capital. His research process, portfolio construction, and risk management frameworks are designed to generate consistent, absolute, and relative risk-adjusted returns independent of the market environment.

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🏷️ TAGS
#stockmarketnews #earningsseason #fed #fomc #earnings #bonds #usdjpy #oil #macro #bitcoin #thematicinvesting #inflation #pce

This episode is presented by Edge Edge is our Pro topro advisory service which is all about the macro with a focus on onetoone engagement with the hedge fund manager Craig Shapiro and direct access to luk trading founder Samantha luk for more information about Edge visit www.l trading.com

Edge hey greetings thank you very much for joining us for macroo micro Power Hour I’m Samantha luk founder of luk trading.com and joined by our macro advisor Edge manager Craig Shapiro hey there Craig happy almost end of the week how are you doing all right good it’s um

You know earnings is always the busiest busiest season that I have just because there are a lot of Trends and swings that are open and then lots of Market moving actions so the chases are robust as well and lots of client engagement asking about this that and the other

Thing so it ends up being kind of like this breathless period of time for many many weeks this is actually kind of a rest bit for me talking macro because my my total focus from the live trading room to all the engagement during the day is just what’s moving and

Why and how we’re earnings and we’re still you know just kind of getting through the last little dribs of it but they still matter I mean we had we had Celsius into you know the the the wonderful report and it’s just exhausting but it’s also exhilarating anyway I can’t wait until earnings are

Over yeah stor are you afraid you asked or what it’s macro Time March is macro time I guess right okay please okay so catch us up we had the pce this morning you watch all of this data like a hawk and we’re going to talk about uh macro

Event data obviously and then risks potentially but right now rally is clearly firmly still in play look I think you know the year has has has gone it’s been pretty interesting the way that the market has brushed off the bond market and fixed income moves where yields have moved higher right we

Started the year where the market was anticipating you know six or seven interest rate cuts from the FED after the after the pivot the December meeting and and kind of post the uh the November qra announcement and so there was some you know just some Euphoria about how

Much easing we’d get in 2024 and you kind of walk in this year and the data has reacted in a positive way the macro data has reacted in a positive way to the significant loosening of financi conditions and we’ve seen growth outperformance we’ve seen the labor market remaining uh pretty robust and

We’ve seen and I’ve been pointing this out a a reacceleration of inflationary pressures that showed up in the January data at the CPI data and then again for the PPI data which raised the expectation for today’s pce data came in at 0.4% which you know the market has

Reacted as if this is like not a big deal and in line with a revised higher number but if you go through the guts which I’ve been going through all day I mean there is a significant amount of re acceleration of inflationary pressures in the economy right now we just got the

Dallas trim Meine which kind of parses the data and you know 58% of the components in the pce now are rising at 5% or greater which is the largest percentage at 5% or greater in over a year so and that’s up significantly from last month and the month prior and the

One Monon annualized uh trim mean which kind of takes out the the high and lowest contributors to inflation is running at 5% year on-ear so the data for January is being largely seen as seasonal or oneoff or weather related or insert excuse here but as we move into

March and we start getting the February data to the extent that this data is confirmed in February which I suspect it will be then we will have a situation where it’s going to be even more difficult I think for the FED to embrace this idea that we’re going to be getting

Cuts uh you know come summertime we’re going to be getting three cuts and that this economy actually needs um you know the interest rate so look right now the market is is trading what the FED is saying and so we can’t trade the FED

That I can’t trade the FED that I want I have to trade the FED that I have right and the FED that I have continues to say that policy is restrictive and that inflation is going back down percent but it will be increasingly difficult for them to keep saying that the data

Continues to come in in an adverse way and I think we we are seeing that we’re seeing more of that and I suspect tomorrow we get the um ISM and then next week we get the services PM PMI and the payrolls and what we hear from Powell

And I think we’re going to see he see and hear more of that talking up the strength of the economy and talking up labor market and inflation so while so far the equity Market has uh Slough this off U I’m not sure that’s going to be

The case forever you know but we do have a strong long close to February they marked them up nicely into the close uh tomorrow is a new month and we know that there’s inflows uh that come in just from 401ks that you know people get paid

On the last day of February and that that money goes right into the 401K and that money hits the market the first day of the month so that’s tomorrow so maybe it’ll be uh you know something that that we start to see next week with Powell

But I I’m just I’m not convinced that this Equity Market just runs and runs and runs all all all year um without creating a a reaction from the FED that will incite more tightening or less easing of policy so on earnings since we’re almost kind of through that window

Um any any takeaways from the results obviously since the cuts have just been really not put back in um we have really a wide gap between expectations here of um forward earnings and what’s actually been delivered but again Market has been rewarding wonderfully um any beat I’m

Punishing severely any Miss so this is really on its own TR you know projectile as as fomo Panic is still taking place expecting this market to continue to ramp higher um in fact um Bank of America just came out with a 5500 label for their new res um revised fpx Target

So right now we’re still in the grip of fed doesn’t matter uh they’re they’re supporting this Equity Advance maybe it’s in cahoots with treasury because the the better you know the market does uh companies you know perform wages keep getting you know supported then there are better tax receipts potentially to

Help offset some of this treasury um drag but um talk a little bit about earnings and then of course talk about yellen’s next kind of rodeo which is the end of April for quarterly refund I I think this this quarter there was so so when when things are kind of moving in

And trending in the right direction everybody goes up the earnings all get bought together or they all get sold together and there there’s High correlation of earnings and stock performance um you know throughout the quarterly reporting season and and we saw a lot of that in October and November reporting season right mostly

Uh beats got bought and misses kind of got bought because they were you know um expectations were low what what I think we saw this quarter was a bit more of Divergence right you needed to deliver uh this quarter in order to outperform and I think that typically you know I

That’s healthy right that’s good for stock Pickers um and folks who can kind of get the get behind the numbers and get them right um but it I I think it’s it’s signs of a market that is um you know not broadening out and is becoming more narrow um and so while Nvidia

Clearly knocked the cover off the ball and micros you know and and meta did as well you know with apple and Tesla and Google you know they’re not back to their highs right and so and then we saw it’s even today right snow you know Gana

Got hit and CRM had gotten hit but OCTA blew it out right so there there’s that Divergence of performance in the in the big cap Tech space I think with respect to you know the the the ultimate broadening out which would be kind of this rotation out of tech into small

Caps I look I mean we still have a basically a third of the companies in the Russell uh are not profitable and I think overall the earnings growth for this quarter came in at like you know down 30% year on-ear I just think it’s difficult to holistically think that

We’re going to shift capital from you know strong IIA uh AI related names that are beating numbers into companies that continue to miss um where the pressures from higher interest rates and higher labor costs and higher energy costs are crimping margins and I just so I I don’t

Really see that as a sustained uh move uh as we TR you know keep transitioning through this year particularly if I’m right the inflation M pressures are going to be stickier which is going to prevent the fed from easing as much as or you know as much as they believe and

As and as much as the market thinks so I think that’s where things stand on that um you know I have this you know very very aggressive mode right now in chasing those small caps right so I mean as a as a tradable context there are select small caps especially in biotech

And retail um and tax left for dead IPOs that still have a beautiful setup for higher if everything else kind of Peters out at the Top Line in other words we go sideways in time not price it allows or forces some of this everything rally to Rise Up from the very oversold play

Biotech and such so it has been a theme whether it can follow through against the macro backdrop of rising rates that’s another thing to be determined but so far it has been a very very profitable yeah but you but you got to get the you got to get the names right

And you have to get the the sectors right because they don’t all they’re not all moving together so this is more of a kind of a broad comment but yeah I I agree and I think we are in that kind of stock Pickers market and there are some

Mega themes you know around Ai and around glp and around you know other you know thematics electric infrastructure and and other and other types of things where you the industry fundamentals are good and companies are are delivering but I think if you look more broadly at the global economy and the manufacturing

Economy it it’s it’s not great uh China’s not great uh maybe it’s bouncing off the bottom but with no particular rigor and so I I don’t think we’re going to get a strong re acceleration of cyclical growth momentum broad Industrials or broad materials or Commodities or or or things at that are

Much more cyclical in nature I was I agree with you on that I was asked that question repeatedly what about Commodities what about Commodities I’m like well the the market usually bottoms first Commodities later but also they’re so cyclical they’re so tied to supply demand and this is totally separate from

The conversation about that the fact that they have been falling quote unquote you know the the Bloomberg um Commodities index it’s not a tellon inflation it’s not in other words they’re trying to kind of tie them together food is not going down you know we’re up 25% uh on a compound basis

Since the co lockdown there are lots of things that are higher um from an inflation stand point but the rate of change has been very very helpful no question for also um I know you have been on this strongly that this is already troughed in other words this

Inflation impulse has it’s done going down you know even if we chop about here for a little bit Wall Street measures anyway for inflation is really still not going to ignite Commodities per se as an inflation in other words Commodities as an inflation hedge it’s not there but

We’re absolutely not going back down yeah can I share my screen can I share my screen real quick oh God yeah yeah look this is something that I I was kind of talking about all day on on in my room and on Twitter and this this is a a

A chart I know it’s hard to read on here but I posted it in my in my in the channel and I posted it on Twitter and this is the super core right this is core Services X housing inflation and you know month on month so first of all

This is the year- on year so this is what you know there’s been a nice progression lower this is the first month now year on year where uh you know we we’ve rallied again we we’re back up and notice we’re we’re we’re at 3 and a

Half% right we’re not at 2% and so the FED has talked about you know the three different layers of inflation there’s Goods inflation there’s housing inflation and then there’s core Services X housing so this is the the the super core this is what is you know 50 plus

Percent of the prices um and so it’s just not clear to me that while there has been momentum to bring this down this is not anywhere near going back to 2% and then when you look at it on a month- on-month basis and this is what I’ve been talking about about why I

Think inflation is bottomed or bottomed in in October right this is now the third consecutive month of sequentially stronger month-on-month frint so went from November .17 December 0.25 and then this January is 6 right now can see here I mean 6 is this is the third largest month-on-month acceleration of super

Core inflation that we’ve basically ever seen or at least in the last you know the last 20 years and or you know well certainly since that you know the pandemic it’s the second highest since the pandemic as well and so people are looking at Commodities and saying well Commodities aren’t aren’t contributing

To inflation this is a dis inflationary environment but I mean this is you know 55% of the basket is showing very sizable uh inflation momentum I mean and I I think you know things like insurance I I mean you know I’ve got I just recently got my insurance bill for

Health insurance and for um you know uh auto insurance and for property insurance I mean these numbers are massive right they’re just significantly higher I think these are these are the contributions to that close to 60% of components which are running five to 10% or higher um so there is a very strong

Re acceleration that’s already kind of underway here you you can see in here in financial services that th this number here is kind of tied into the stock market right this is like portfolio management fees and other fees I mean you know as the market does better we’re

Paying you pay out more to your advisor right big acceleration of data here um does that include the bit the Bitcoin ETF fees that are absolutely printing yeah now so talk about timing yeah so look I mean now in a way I feel like um myself and you know maybe America is

Being gaset here uh by the fed and by the administration you know telling us that there’s no inflation or that don’t worry it’s it’s under control um you you know and I’m just I’m looking at it’s like my eyes are just you know it’s like

I’m looking at the data and the data has shown re acceleration and the question is when will the FED acknowledge that and put that into their calculus and into their reaction function right they entered the year with this idea of how the year would play out and why you know

Three Cuts would be appropriate because you know in their mind these were kind of real rate normalization Cuts right if you don’t cut rates while inflation is falling then you’re increment adding restriction to the economy and they don’t want to do that so as inflation Falls you want to bring rates down the

Question I would push back is where is there evidence that their policy is restrictive they keep saying it’s restrictive but GDP growth in the first quarter looks like it’s going to come in around 3% after 5% in uh the third quarter and north of 3% in the fourth

Quarter so GDP growth is over 3% inflation is reacceleration you know is reaccelerating um and as we get upward surprises on growth momentum and a sticky labor market that doesn’t deteriorate the fed’s going to have to take up their estimate for year end 24 inflation and that will be the way that

They start to price these cuts out now listening to all the FED speak this week you wouldn’t have you know they’re not there yet which is I think is why the equity Market continues to just March higher right the equity Market is not concerned absolutely that the FED is

Going to remove the punch bowl but you know let’s see what happens next week when pav speaks and we get more data cuz last year if you’re remember when he speak specifically he speaks Wednesday morning Wednesday and Thursday um last year for the Humphrey Hawkins testimony he delivered a fairly hawkish message

After you know the first two months of data showed reacceleration and inflation hotter and stickier than expected now I’m not suggesting that that’s what he’s going to say but he did do that same thing last year now if you remember he also did it the day before svb started

To blow up so it just kind of kind of messed up the you know the Nar but the FED did wind up uh raising rates in March even though svb was was basically you know needing to be bailed out so um look if if he wants to deliver that kind

Of message this time um and remind the market that polic is not on a preset course and if inflation comes in high that expected the FED will not be cutting you know he he can deliver that message and he has delivered messages like that in the past and he typically

Delivers those kinds of messages after big easings of financial conditions big rallies in markets and big V crushes right because as we’ve discussed a bunch of times I I think the the FED is in that kind of buying time business right when they when they are and so they are

V sellers when V gets too elevated because they just want they don’t want the markets to crap out and for them to have a deflationary massively deflationary episode where risk is off and we go into some sort of big recession but they also don’t want um

You know volatility to get too low that incites animal spirits that loosens Financial conditions and that raises inflation expectations again such that they would become unanchored and so I think here with markets at the highs with crypto making and ripping to you know to recent highs um and with

Inflation Break Even yields moving significantly higher since the beginning of the year we are at risk that things can start to become unanchored so um I I think it would be prudent for the FED to interject and push back here doesn’t mean that they will but we should be

Mindful that if they did and if Powell did that do that next week um there could be an adverse reaction because the market is not set up for for that and we could be in a situation where the Dot Plot moves in March from three cuts to

Two cuts it would only take two members of the FED going from three to change their basically change their mind on three versus two um and so you know given the data that they’ll have for all of January and all of February we could be in a situation where they do that I

Think that is the that that is the pathway to popping the equity bubble and I’ve written about that and spoken about that we need to remove the idea that the next move is a cut that will be the ultimate topping situation for for risk assets is when the market needs to uh

Properly gauge whether or not the FED actually will be cutting or may actually be raising and we’re not there yet but I think we are going to be on a path towards that so right now all of that prefaces your model based on kind of monetary dominance right where the fed

And treasury are really kind of in control there hasn’t been this transition into where the political pressure is you know put on Central Bank to accommodate this government deficit spending that then needs to be monetized so what if you know the dollar isn’t you know Rising which is a headwind in in

Many cases to equities and yields aren’t spiking higher but staying very steady because inflation is entrenched or as you said it’s it’s you know reemerging um it never actually left for Main Street but I mean as it relates to the uh the data what as what’s your kind

Of reasoning or how do you kind of justify um the market activity with fiscal do dominance as a backdrop in other words I said this in mid November it’s very very hard to short this market right doubled down in January it’s very very hard to short this this market and

Jeffrey you know reminds our you know classical e econ Economist says you can’t short in fiscal dominance so how much grab or weight do you put into your model of looking at uh Fede and treasury qra decisions as it relates to they just want to keep you know things stuck

Together in an election year and somehow come up with a way to pay for the rising costs both of the deficit spending and the interest on that debt yeah so look I mean there there have been various examples throughout history of central banks that have raised rates during

Election years um and there have been various examples when they’ cut during election years and there’s been examples when they do nothing so I I think it’s hard to kind of you know suggest that the FED here is is necessarily doing something to get one side elected versus

The Other Side the FED specific I think treasury has a much more um you know political ambition right and so there is more incentive for Yellen to act in a way that would help keep risk assets afloat and help keep people in jobs and and and make people excited about you

Know reelecting the current government and so she has some tools tax receipts help too right but those tax receipts are not coming in right now yet right I mean if you think about the way that most so so there’s an argument that says as the market improves um tax tax reets

Will go up because capital gains taxes will get paid and stock comp will get paid now that’s true and if you look at the Historical correlations it’s it’s very accurate I just think there’s a there’s a timing component here that is not people who are who are selling

Stocks now aren’t paying taxes on these until next year but it’s not just the taxes it’s also keeping folks employed and that consumption function yeah but but but there’s not incremental moment like we had that momentum last year right so that the the the the pickup in

Tax receipts would come from asset price gains from the stock market and from executive comp from Big tech companies folks who are uh exercising options uh and and so the point is they had a 54% advance last year in NASDAQ I’m thinking they’re going to get some tax receipts

Out of that yeah and and that’s why Yellen has um you know said that there will be negative bills issuance in the second quarter right they’re expecting they’re expecting robust tax receipts now if if she was purely political she would have said she wouldn’t have increased the duration um schedule for

The second quarter but she did right we’re going to be selling 500 billion of duration Securities in the second quarter and then in the third quarter and then again the fourth quarter so I I think treasury can be political let’s put that to one side as far as the FED

Is concerned I I think they are look that what they’re trying to do is they are trying my sense is that they are trying to bring inflation back down to 2% they are using interest rates to do it and what they have gotten wrong is that pick up in interest rates has

Actually been inflationary because the government is the borrower is the most leveraged player and the government is now paying out higher interest to comp to rich people and to Rich cashr corporations so actually overall net interest expense hasn’t moved up materially like they would have thought because people and companies have locked

In low borrowing rates and so the fed’s policy hasn’t been as restrictive um as they would have thought the the reason that inflation has come down so far is because of Supply mostly because of supply side um Dynamic and these transitory factors that just took a

Little bit longer uh to play out and so I I think from here the question is can does the in order to bring the F in order to bring inflation back down to 2% the FED would have to raise rates even more to really crimp private demand in a

Way that is uh offsets the benefit that rich people and Rich folks get from the higher interest and the problem with that is that would cause a recession and so now yes that there’s an element of of fiscal dominance in there um but it’s not something that I think the FED is

Actively thinking or not they believe that their their rate tool can work and so I think they will keep at it if they don’t see the momentum getting back to 2% um they won’t cut rates and maybe they’ll even have to you know raise rates if if inflation just doesn’t

Reacel if the Iration doesn’t stop reaccelerating so and it’s really not their problem so to speak to kind of discipline the or or or or to react to the government’s need for for lower interest rates at this point um so while I do believe that we are in this fiscal

Dominance regime I I don’t think the FED is you know out of a desire you know I don’t think the FED lacks a desire yet to try and particularly to try getting inflation down and particularly when the data allows them to to wait and the markets allow them to wait they I don’t

Think they I don’t think there’s any real need for them to provide additional accommodation by by easing if they really were if they if they were really serious about getting this down I think what they what they should have done is they should have done QT much more aggressively brought down the balance

Sheet much more aggressively it would have hit the wealth effect channel in a larger way and they wouldn’t be in a situation where they would have had to raise rates as much there would have been a much bigger impact on QT that that ship has sailed but that’s what

They should have done they should have sold asset it should have been more aggressive on QT before they started raising rates because the raising of rates has actually made the problem even more difficult for them because of how many people now are living off of 5% savings rates and companies that are

Literally so many companies that aren’t participating in this kind of um fomo move are still asset rich and Incredibly it’s not it’s not a growth move it’s not a you know um speculative fomo move but you got a lot of companies that are still very very fat and happy with their

Interest on cash but as relates to the the FED uh you know duration shock they don’t want right we don’t want to have a spike and yields that causes equities to sell off but I do think that they want inflation it’s a way to kind of you know

Default on government debt little by little so there is a there is a very few options of um kind of maintaining this uh inflation not too hot not too cold I don’t think they want deflation so right now why would they make any moves unless there is uh a change in the economic

Backdrop equities have some kind of swoon but for right now they’re they’ve got the sweet spot and I think the market smells that and the bond market what is what is it doing yeah the bond market I think is kind of gradually coming to grips with the reality of a

Fed that’s not going to cut as aggressively and inflation being stickier right we you know yields this year have moved higher they haven’t moved higher at a pace that is concerning and term premiums haven’t you know moved materially into positive territory so it’s it’s been you know

There’s still a there’s still a belief in there that eventually the US economy will suffer uh from this rate this rate move commercial real estate market you know will suffer um other parts of the economy that are yield sensitive will suffer you know starting to see more warn notices and some layoff

Announcements right so we’re getting so there’s a belief in in parts of the bond market that eventually the us will have its its growth slowdown or its mild recession and so I think that’s keeping maybe the back end a little more bid than than not but you know broadly

Speaking the yields have moved higher to start the year the dollars moved higher and equities have said yes they’re moving higher but it’s really not enough to offset the benefit that we’re getting from from this interest payments right I mean Apple and Google and these cash companies are making shitloads of money

By just investing all the excess cash into uh into t- bills and the companies that are struggling uh that’s why you’re seeing this you know Rising bankruptcies right there there there are companies that need Capital that can’t get it and if you have Capital you have an unlim

Limited amount of it and you’re actually earning on it right so there’s this bifurcated economy bifurcated Market where the halves keep winning and the have kns kind of keep Lo check this out I got to share because I thought this was a fascinating article can you see that yeah debt addicted companies look

To equity as interest Sky interest cost Skyrocket for the first time in over two decades it is cheaper to sell shares than issue debt yeah so comment yeah I’m surprised more I’m surprised we haven’t seen already an equity you know secondaries being uh we saw a couple convert started to see some converts

Right smci did a convert and there another biotech compan so I I think we’ll see maybe we’ll start to see more of that in coming days and weeks um but yeah I think that that’s you know if companies want to survive they they should be um you know doing more to

Raise Equity here I think that makes a lot of that would make a lot of sense and you know that that could provide some uh headwind to to uh you to Market momentum as we start to see more Supply to offset the the share BuyBacks and the

You know and and the the demand so but it is a a new trend very early in that assessment I’m not quite sure that would um support my kind of uh 1995 esque Market feel in some regards because this Market does have a little bit of that

But getting back to just a kind of a a comment on the fiscal dominance and by the way this is open to Q&A I forgot to even mention that at the beginning duh Power Hour ask questions hit us up in uh in Zoom Q&A all right so what is the

Risk though that we need to kind of look for as it relates to Boiling the Frog slowly in other words inflation is a way to default on government debt little by little um when do we get kind of a real problem for the FED is if Market interest rates begin to rise with

Economic recovery is that good or bad and then it does that Force Banks to start lending out uh some of their excess reserves actually they have a lot of excess reserves that would be much more inflationary would there be any reason why you would see Banks start lending out some of their excess

Reserves which would definitely be a um a sign or a tell for uh further inflation yeah I don’t I don’t suspect that there there that there will be um I think banks are still trying to come to grips with the reality of the commercial real estate situation and just real

Estate broadly speaking what what their exposures are and so more companies are reserving more are going to have to reserve more for the losses there right we’re just starting to see kind of the early recognition of losses in some of the office properties and some of the

Banks that are exposed there so but there also there are a lot of folks waiting in the sidelines to pick up those you know Pennies on the dollar type of deals so it and the more time that goes by uh C gets to kind of repair

Itself it’s a very slow heal but it does not trigger contagion it obviously would have by now it’s been yeah look I think one of the issues is that the you know we’re we’re we’re kind of changing the way that Finance you know gets done which companies and which Industries

Need Finance um you know the the traditional model of going to the bank and borrowing and getting a loan uh you know is increasingly being replaced by by an equity you know the equity culture right and not even just the kind of big cap or big Tech Equity culture and VC

Culture but even smaller companies that are want to hold want to retain more of their ownership um just raising you know via e Equity Capital as opposed to debt capital and so you know I think that there is a you know dynamic in play there for for banks where are they going

To be what kind of loans are they are they going to be Mak me and it’s not as if we need we said differently the the the trends in Ai and glp and some of the mega themes uh are not Capital intensive right so we don’t need debt Finance for

You know for a lot of those um a lot of those Industries and the industries that typically would get debt Finance Capital intensive Industries um the returns are not there for them to be investing and so there there’s a there’s a dir of of of demand for loans right you know and

Particularly you know for some of the commodity more commodity sensitive stuff a lot of these companies are just they’re not they’re not raising capb back So eventually this is going to be a problem right eventually we’re going to need to invest in oil and oil infrastructure and copper and like but

Right now it’s not we’re not seeing a massive re acceleration of demand for that kind of lending and so no in fact cni loans have have started to roll over so so story that was hot fire flames everybody’s very excited about that yeah

So I think bank I I don’t really see a a big pickup in kind of Bank lending in that in that manner um but look I think I think what the FED is trying to do is they are trying to keep a enough inflation around to help the government

Uh pay its debts uh encourage tax receipts encourage speculation but not create enough inflation or too much inflation that it becomes a social issue or becomes an election issue and that’s a that’s a delicate delicate balance You could argue so far they’ve done a very good job um you know they were obviously

Were late to the party people got annoyed and inflation went to 9% and and markets got hit in 2022 but since then since late 2022 as as the you know fed has raised rates brought inflation down even though most of it’s not been because of them it’s because of been

Supply side but whatever they’ve been able to keep inflation expectations well anchored um you could argue they’ve done a reasonably good job there hasn’t been any rioting uh about high prices in America right in America no in America South America yes and and so uh the question is from here into November can

The FED kind of continue delivering that message or do prices and does the equity Market kind of reignite in a way that people uh really start to get aggravated more about inflation and you know that’ll show up in confidence numbers that’ll show up in poll numbers and um

That’ll that’ll show up in uh a variety of different ways and so I think you know maybe right now what the equity Market is sniffing out is a Fed that is swung the pendulum properly um got inflation down to a point but what I’m seeing is this re acceleration is is

Already underway it’s becoming much more entrenched and how far can they allow it to go before it becomes an issue that they need to address and I don’t know the answer but I think after they get the February data that confirms that January wasn’t a fluke it’s going to become more

Top of mind for them to try to think about how to deal with all right so that’s coming up for March um what about the btfp the bank facility that ends on March 11th that’s a question and the any worries there I think you said you weren’t because they’ve got basically a

Year extension they have a year left right so basically as of March 11 there will be no new uh lending into that but you have a year to pay back that loan so um I don’t anticipate that’s going to be too much of an issue uh for liquidity

And you know broadly speaking there banks that need liquidity can find liquidity at the standing repo facility and or the discount window so there is ample liquidity around still um and I think that you know the one again a way to bring down inflation would be to

Remove the ample liquidity that that or the excessive liquidity that that is still around it’s still around though it by by some measurements it’s three trillion there Bank Reserves themselves are three and still three and a half trillion they’re they’re they’re you know basically all the money the you

Know the money from the RRP which was over 2 trillion um you know half a trillion went into the TGA from zero and the other trillion and a half went to Bank Reserves and so Bank Reserves now are at 18-month highs and so there’s plenty of liquidity that banks have uh

To do whatever they want to do and and lend in a way to financial participants and I think that’s what we’re getting is inflation Financial Market inflation and wealth effect inflation is kind of filtering through the real economy and making it more difficult to get back to

To 2% so the FED should be removing liquidity um anticipate that’s what they’re that’s not what they’re doing right even Logan who had the speech earlier this year you know there was an article yesterday that said she was surprised by the markets reaction to her because she basically said this doesn’t

Mean that we’re going to stop early it just means we’re going to take a longer time to get to you know to we don’t have a blowup and the market took that as saying well they’re going to stop qt in the middle of this year which was not

Her intent it’s almost like the the FED still does not understand how the market react to their their and they don’t do to dissuade Market participants from taking whatever they say into the direction that they want all right so when do they next get to talk down the

Market because we also have um other structural flows that are supportive of the market and I do mean BuyBacks ctas option flow um earnings are over but we we definitely definitely have um you know a structure underneath the surface that says hey these short upside calls

That uh folks were were chasing um and even if they were shorting that the market has risen into them so they need to buy them back I mean the whole tail wagging the dog in the options Market is continuing to fuel this energy for higher plus the other kind of in price

Insensitive quants and and the like so the question is when will they speak the uh you know the restrictive language that causes those flows to slow and potten potentially uh revert yeah look I mean we we are as we push through tomorrow and into early next week we’ll

We’ll start to get because xir is early in March um tomorrow’s the 1 and March xer is the 15th um the fix xir comes after that so look we’re we we’re back to that point in the cycle where you know the buyback flows and the Hedge

Flows start to get um Unwound and there will be kind of natural buying pressure um you know into into that March expiry so Blackout Window starts on March 14th and lasts all the way to April 26th you’re saying for BuyBacks yeah yeah I mean I think it’s really more of a end

Of mar you know most companies can can’t can’t buy a month before so but yeah I mean Peak share buyback blackout will be kind of by the last week of March and for the you know for the basically all of April but look I think the FED next

Week Powell has Powell has the last chance here right if he wants to uh say cut it out um if he doesn’t on T Wednesday then I I suspect we’ll just bubble up uh even more into the March xery um for uh that’s my call for for

The 15th and you know they had those JP Morgan flows for the end of the quarter um but again I think Powell has the opportunity next week we need to be mindful of that he had he he could say something that is incredibly um hawkish because he will have you know some data

That allows him to do that if he wanted to tighten Financial conditions not saying he’s going to but we have to be aware that there is a chance he he will because he’s done it before Jackson speech a couple years ago he did it last

Year so there you know if he wants to smack the market a little bit he can um and if he doesn’t then I suspect we’re going to probably keep chasing higher into the March expiry supported by these buyback flows and then on the flip side of that I think the day basically the

Day before xer and short gamma dealer flows yeah exactly we get now we do get the the CPI data point I think that’s on March 12th um so that is a couple day I’m just confirming um that is on Yeah March 12th which is Tuesday uh of xury

Week so obviously that’ll be and then we get PPI on Thursday the combination of that kind of creates the pce for the end of the month so that that expir week will be important um but probably between Powell and that CPI I could see how we just kind of Bubble Up and then

Depending on what the PE how the inflation data comes in if it comes in hot um you know that will be I think a concern if it came in cool then we’ll start knocking in all these calls that you’re that you’re with that that deal that dealers are short right so I have

To show it because we do always have the potential of volatility repricing equities but we also have the potential of a crash up in markets simply by the Dynamics of this this this dealer gamma you know literally chasy Behavior where they short gamma in the upside strikes

And they due to client demand and they just have to work themselves into it and it’s supportive so we really have to kind of look at the fact that the spot right now that 5100 call wall and all that stuff we could absolutely build out into further strikes which is probably

Why Bank of America you know came out today and said H uh excuse me excuse me we’re gonna we’re going to revise that 5500 they’re looking at stuff like this yeah it’s a potential it’s it’s still a backdrop I see of why we can also have

That kind of rounding out I hate to call it the everything rally but the junk that if it’s selectively chosen either I mean the the most short basket right is a good representation of um it’s not the only representation because it is junk there are still a whole bunch within you

Know biotech we’ve been crazy crazy about this thanks you know in large part to Alex our biofarma um analyst and Trader but I mean he’s really really gotten in there and figured out which ones are real right which ones are just a trade yeah but I guess what I’m saying

Is you have you have a a good amount of capital that trades in a Longshore capacity that runs lower volatility strategies in the multi manager community that is forced to short stocks right and the most short basket is now up like 50% from the lows in the end of

October and it’s up you know 25% in in four weeks or so so um it doesn’t mean that so it’s come far it could keep going it hasn’t taken out the the July highs yet but typically what we get is we we we get exhaustion on these shorts

Right and we get um kind of buying exhaustion and get the rsis of this short B basket up to 99 the 99th percentile or very elevated levels and that just kind of shows you the these max pain points for the multi manager community and then that that’s and then

They and then that’s it and that’s your blowoff in that and then we start to um see those fall again as people regrow into good Longs and and good shorts so I think we’re in that phase now where we’re having a bit of a beta rally

Shorts are going up more than Longs even some of the long you know Longs haven’t even really some of the best Longs have kind of stalled out um and so I think some of the hedge fund communities in some pain here as their Longs are going up less than their shorts that could

Continue you know for another couple days or week or so but um at the point where when we start to see the most short basket stall out I think that would be a good time and a good tell to say okay the nonsense part of this rally

Is is over um and then we should go and yeah no I’m not saying it hasn’t happened yet I’m just saying that that again these are the signs these are the signs to look for this I this I agree with you when that Dez Peter out in the particular short basket then we

Absolutely the next step is volatility doesn’t mean it’s going to be a trend reversing volatility but we usually do have shake and bake but I have to also show you because we were just talking about the uh the gamma dealer you know namora chart um this is a byright

Monthly index which kind of shows you that they are still all bowled up you know on the lows here of October right before the FED pause of November 1st and yell and yatsi right we got above technically this is my intermarket but still we got above the 10 and then just

Really have held that extremely well spy is an orange we came back down only one week in January right when we had big Tech kind of softness for that uh first of the year selling um and we got right back up on top it’s only recently rolled

Over and I literally posted this for clients going okay let’s see if it gets back above the 10 look at the Gap that came in that was just on you know the Nidia excitement post Nvidia excitement so this is all of spy um but it’s still they’re chasing

They’re chasing higher we have not rolled over it even if you don’t study the option structure Market you can kind of just use that as a tell to say we we we just they’re not they’re they’re not giving up yet we need a reason we need a

Macro trigger yeah look if we’re not going to get I think the again the precursors for the equity Market to care are a a view or an understanding that the FED is no longer going to be providing a level of accommodation um to this Market that it expects because the

Market is consistently in an incessant need for liquidity and so the FED has allowed the animal spirits to take over and has allowed the market to make highs and has basically said they’re still going to be cutting this year even though growth is better than expected and inflation is hotter than expected

And if that’s what the FED is going to do then yeah makes sense why NASDAQ is making highs and crypto is making highs riscon you know and and most short names are making highs and so the question from here is how long will the FED let

This last and the reason I focus so much on the FED versus treasury or anything else is because the the the US government’s budget is set right like there there’s no tax increases coming this year there’s no incremental spending cuts right we we it’s a known what we’re getting out of Treasury and

Out of DC so we don’t have to focus as much on the incremental changes the only thing that could really change here is is well two things won’t it be some sort of exogenous risk right war or whatever new sheriff in town but well I’m saying imminently um before you know but and

And then the FED how does the FED react to all of this all of this data and so if the FED is going to loosen policy while the government is running 6% plus deficits at full employment then you know we are in an inflationary world you want to sell bonds which we’ve been

Saying all year we don’t want to be in bonds that’s been the right we want to buy crypto and Bitcoin which we’ve been saying all year and has been right at least I’ve been and and as far as equities are concerned yeah you know what we’ve been saying is I’ve been more

Negative on equities because I I thought that equities were going to react more to the dollar strength to um the move and yield but it’s it hasn’t been out we have I haven’t been short Tech and some of the small cap stuff has way underperformed so yeah it’s been the

Wrong call on on equities but it’s been I think more than made up for with with not a game of perfect we’re figuring this out yeah and so from here how long was a Fed going to allow this to to go on and I think what we have is a market

That is going to shoot for the level that makes the FED uncomfortable I like how you put that I don’t know if it’s at 5100 I don’t know if the FED is uncomfortable yet 5200 NASDAQ 20,000 Bitcoin 100,000 right like maybe those are the levels that the FED becomes

Uncomfortable but there is you know oil you know I think one of the things that’s benefited the FED has been oil right oil hasn’t made a subst stantial upward move yet because you know most Americans um who aren’t like I think most Americans are are following inflation much more closely than ever

Before but without gasoline you know gasoline you you see that every day you see that every week until and unless gasoline really starts to move higher people feel okay if gasoline was now look gasoline is has been moving higher for the last several weeks and is almost

Now higher year onye on a retail at the retail level um so we are getting closer to that point but if gasoline goes from here um then I think the FED is completely screwed and they will have to always been inflation tell for you know for Rising expectations but it’s still

Not allowed to go up it’s I firmly believe it’s in the category of not allowed to go up yeah look I mean I think um you know we’ll see right we’ll see how the go how the administration deals with that are there things are there levels they could pull keep

Gasoline prices from moving High sure um but if it it goes if it moves higher then the FED will feel uncomfortable and if you know S&P is at 5,500 maybe the feds uncomfortable there like I said Bitcoin at 100,000 right the the market will start shooting for those levels

It’s it’s like the it’s like the opposite of the Bond vigilantes right in a way like Bond vigilantes that you know would would take would sell fixed income to force governments to react um and cut spending or raise taxes it it’s almost like we it’s not that it’s like an Inver

Yeah I guess it’s like an inverse it’s like the equity Vigilantes are rallying risk so much so now to force the FED to to tell them to to stop right and the reason they want you have to tell them to stop is because that inflation is going to run out of control

Again um and I think that’s that’s the phas that we’re in right now I don’t know if the FED feels uncomfortable yet I think after listening to the sped speeches over the last two weeks they’re not uncomfortable yet it doesn’t mean that they’re not going to get more

Uncomfortable now they just got this data point again today and and for the next few weeks but you know we we’ll we’ll see how they react to this data all right well I think that that um we have I have so many charts I want to

Ask you about and topics I want to kind of go through but big picture the market is bullish and till it has a reason not to be we definitely have controlled quote unquote yield inflation oil spikes or they’re just not allowed even dollar um we didn’t talk about Bank of Japan

Their statement Yesterday by a board member who said we need to end and you know go normal but um it’s still a prep shoot as to when any other inferences from uh Bank of Japan because we have such a strong uh carry trade potential unwind which could trigger what we also

Have in bond land which is very much this um you know their short bonds long NASDAQ very very strong um pair trade anything that would come in from Asia yeah look I mean these are not that these are exogenous risks but these are the you know this is where the the

International scene could upset the apple cart right if Japan really does go through with tightening cycle um I actually there’s actually just some comments right now from UA on the tape where he’s saying um inflation is easing at a quick Pace wage negotiations will Aller Tailwinds so someone like he’s

Pushing back through the statements last night yes um so look I I don’t there will be a time when Japan decides to normalize policy in some respects uh do seem like we’re there yet yeah um they they do meet this time before the FED I believe so they would never do it so

Agreed I I don’t so but that’s yeah that’s that there’s a there’s a chance that if they were to Titan policy uh carry trade unwind yields move higher uh would be an issue and then the other one is China right China is going into the NPC meetings this week uh next week and

I think there’s always expectation that China will stimulate more you know to the extent that that is not the message that comes out of there and and they’re kind of happy just allowing the economy to to bleed out slowly um you know folks who are have been chasing the China

Rally may be disappointed you know so we’ll see hasn’t gone anywhere yeah I mean there’s been a lot of call there’s been a lot of call buying it’s had a good bounce off the lows um but but I don’t I don’t think that’s something necessarily that will

Back up and and hit the us too much I think what would hit the US from China would if there was a devaluation of the R&B I think that would be something that the US market would have to take into consideration and then in Europe it

Seems like Europe is kind of just doing what Europe does it’s not you know it’s maybe it’s bouncing off the bottom but not really doing a whole lot there inflation is a little bit stickier ECB the bank of England did say they may sell their whole QE portfolio in a yeah

Look at that that’s what I was saying earlier that I thought the FED should should do which in order to bring down inflation um they should be more aggressive on the balance sheet and not on rates maybe the bank of England is is thinking similarly I mean we’ll see that

That hasn’t been uh confirmed by policy yet but it’s something yeah but um but yeah those are the types of things that would tighten Financial conditions that would raise term premium th those are the things that you’d be looking for to say okay this has gone too far but right

Now we’re not really there yet and so I suspect that we’re gonna keep moving higher until until we get to that point we got to find the FED call right they used to say the markets were falling we’ have to look for the the fed put well

Now we’re looking for the FED call right where does the FED come in and say enough is enough that’s what we’re trying to identify because I think when they do say it is going to be an issue for be subtle yeah it won’t well it won’t be subtle and will be an issue

Right it’s it will be it will be something you know because that would when they if when they come out and say that it it will basically remove any rate Cuts this year because then they’ll move into a window where they they can’t cut it’s too close to the election rate

Cuts are off the table and then people are saying oh it’s April I thought we were going to get Cuts now we’re going to get no Cuts until 2025 this is a problem right but we’re not you know we’re not there we’re not there yet all right well we’ll we’ll keep looking for

It thank you so much for joining us macro to micro Power Hour we pop in and do this uh on occasion probably next fomc I mean we’re getting close into March what uh what date is that again just top of mind I’m gonna be gone the

Week before heads on the 20th okay so let’s let’s let’s you know for sure do that on the 20th how how about and in the meantime wish everyone a great rest of the week you can check us out Lut trading.com if you are new to us oh my

Goodness Craig runs the macro advisor product we also have other fabulous analysts and Traders on the desk and basically you are accessing all of us and uh we wish you a great afternoon thank you so much thanks take care bye subscribe to luk trading YouTube channel

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