If you’re wondering about the scope of mechanical flows which aided and abetted last week’s comeback rally for US equities, just know they were meaningful.
The late-week reversal in key macro trend trades (where that really just boils down to a reprieve from dollar strength) bolstered risk sentiment which, in turn, tipped a few dominoes.
According to Nomura’s models, stocks benefited from more than $31 billion in buy-to-cover flows over the past week from CTAs, “almost entirely in US and European equities futures,” the bank’s Charlie McElligott said Monday, noting that max short signals across US benchmarks and the Eurostoxx were reduced meaningfully.
At the same time, the latent bid from the vol control crowd was nearly $5 billion in just two days on Thursday and Friday, with more re-allocation flows expected amid “substantial” underperformance for realized versus implied, again according to Nomura.
The accumulation of downside protection touted loudly by at least one mainstream financial media outlet turned out to be dry kindling, a dynamic about which journalists (and the eclectic mix of “researchers” and Twitter accounts they inexplicably cite in this discussion), often seem willfully oblivious.
“US equities index and ETF options positioning is seeing puts burned and calls move ITM,” McElligott went on to say, reiterating that “what had been extreme negative $Delta and dealer short gamma” just a few days ago was “fuel for a melt-up.” It’s been “absolutely eviscerated,” he said Monday.
Across US equities options, the $Delta add came to more than $400 billion versus a week ago (figure above), and dealer gamma positioning is now back into insulating long gamma territory.
Looking ahead (and I assume this is obvious), additional gains for equities and the fate of risk sentiment more generally hinges to a large extent on the dollar and US real yields. There’s undoubtedly scope for a dollar correction considering the sheer magnitude of the run it’s had, and the surge in US reals since early August may abate in the event this week’s key US data undershoots.
But over the medium-term, the fact remains that the Fed is intent (hell-bent, even) on tightening financial conditions, so these “sudden” blasts of “impulse easing,” as McElligott described the pullback in the dollar, are ultimately counterproductive for the inflation fight. Or at least they are domestically. The US is effectively exporting stagflation at this point.
One risk is that the Fed is fighting the last war — that inflation is already set to ebb and just as officials loitered too long in accommodation on the assumption they were still battling disinflation when in fact inflation had taken hold, they’re now destined to loiter too long in tightening on the assumption they’re still battling inflation, when in fact price pressures are poised to ease on their own.
If you’ve been reading these pages long enough, it was pretty clear last week was an unclenching of short positions.
Gotta love the shorts. Let there be shorts! God save the shorts! God save the shorts!
“The US is effectively exporting stagflation at this point.“ H
Effectively keeping the price of oil cheaper for Americans.
Asking for a millennial/Gen Z friend: Is it wrong to think the goal of the Fed’s tightening campaign should not just be to slow the rate of inflation but to actually bring prices down in many areas of the economy, including housing/rents, food, autos — i.e., to disinflate (in a meaningful way) the many bubbles it helped create in response to SARS-CoV-2?
You’re not wrong, but it’s not going to happen. This is one of the discussions that nobody wants to have. Once you give everyone a raise, for example, it’s not easy to take it back. The higher cost of labor will be permanently embedded in services sector prices. You’ll get some deflation in goods prices, of course, but the Fed isn’t going to pursue a policy bent aimed at engineering outright deflation. When you think about “average inflation targeting,” there’s mention of tolerating overshoots to make up for undershoots, but not a whole lot on tolerating outright deflation in order to actually bring prices back down to yesteryear’s levels. Increasingly what you’re likely to see are examples of “less M&Ms per pack for the same price.” Maybe not literally M&Ms, but that dynamic.
Which is why, with CBs remain hell-bent on inflating credit bubbles to paper over various financial crises and policy missteps, the middle class in developed countries has lost — and will continue to lose — ground to inflation over the last forty years. One has to think there will be a day of reckoning — and MAGA is a sign it may be closer than we think — but for now “let ’em have bread and circuses” seems to be working for the .01 percent.
Probably no one will like this comment, but it seems to me that today’s inflation, and 2008’s meltdown, is more attributable to those in the much vaunted middle class overextending to buy stuff they can’t afford and, often, really don’t need, than it is to any actions by the 1%. I suspect that statement was politically incorrect, but who really needs a $250 monthly cellphone bill, when they really need day care, two or three car payments, a big mortgage, five or six meals a week out, etc.?
unabated consumerism sure can’t be good for the planet as well…something that will need to be addressed for planetary survival means imho…
Thumbs up Mr. Lucky. But suppose all the young hamsters wake up to this. They ditch their cell phones, sell their oversize SUVs and get basic preowned transportation, downsize their house, eat only at home, wife ( or 2022 husband ) stays home to homeschool the kids, make some clothes, feed the chickens, tend a garden and can the produce. What will happen to my Wendys, Verizon and Starbucks stocks when the hamsters disavow credit and buy only what they require and can afford? Moreover, what will happen to our financialized economy? March 2021 without the federal stimulus me thinks.
Well that is certainly the point right wing media has been pushing for quite a while. Don’t blame the rich guys who continue getting richer while everyone else gets poorer. Blame the victims of inflation instead! We need those uber rich guys to continue getting richer for sake of “economy” and “trickle down economics” and “to create jobs” (that pay far less than they generate for said rich guy). And to pay right wing media personalities a lot of money to feed you these talking points and convince you that you are responsible for your own problems, not the rich guys capitalizing on the economy regardless of whether it’s doing well or poorly.
I’d argue it’s just natural capitalistic dynamics backed by government that knows they need to play along or lose their cushy jobs. To keep growing, companies have to come up with ways to make it easier and easier for the average joe to keep spending. Whether it’s creating the financing mechanisms or more effectively targeting consumers, companies will find ways to squeeze all the water out of the rock.
The government steps in when things go too far to ensure current officeholders aren’t holding the bag when the bottom falls out or they lose their jobs along with everyone else. As much as I’d love to see us build a more sustainable economy, this is standard operating procedure and likely won’t change as long as people are in charge.
That being said, the big ticket items are out of reach or the middle class’s grasp on them are so tenuous because asset prices are inflated and basic services like healthcare, childcare, and education eat up so much of the budget for the average family that they resign themselves to the small luxuries they can (barely) afford.
Economic and political reckoning may influence each other, but neither depends upon the other. The MAGAs are in a world of their own creation and imagination. They may become a threat, but we’re not there yet, even though they’re a scary bunch. It’s a big leap for them to actually take that step, even in their own minds.
Likewise, inflation is a bogeyman. And it’s a genuine problem. But Jay and his Band of Merry Bankers are taking care of it, come hell or high water.
While allowing oneself to worry about the MAGAs is understandable, the truth is that we have a more educated middleclass. Most of us voted for Obama. Most of us voted against Trump. Most of us voted for Biden. And Biden has courted middle-classers at every step.
It is also true that the middleclass has changed over the years. Technically, those of us who are “tech-workers” are also middleclass, though it can be said that some of us are “upper middleclass.” Biden is correct in his rhetoric about how unions once dominated the middleclass, which in my generation gave the middleclass a big voice. But I reckon the voice of the middleclass has only grown larger overall, with the addition of tech-workers.
I believe that the middleclass speaks more loudly than ever. The drawdown of union households in the 80s and 90s changed the content of the middleclass, but the middleclass was replenished during the spell from 2000 to 2022. It voted for Obama. It voted for Clinton. And it voted for Biden.
MAGAs are neither democrat nor republican. They’re a misguided, clearly prejudiced group, a vestige of our country’s history that were animated by the Obama presidency, but only asserted itself when Donald Trump took the political stage in 2015. Assuming that Trump is indicted for his many wrongs and the laws he has broken, his political life will be over.
I predict the MAGAs will continue to assert their voices for the next two years. But after 2024, they will slowly evaporate, returning to the foggy, vacuous place where they previously resided during the Clinton and Bush administrations.