Andy Constan Profile picture
Jul 30, 2023 9 tweets 3 min read Read on X
The huge "hedge fund short" 101
Many have published a chart that say "hedge funds have the largest speculative short futures position in history". The data is accurate. It also needs interpretation.
Here's my chart it's a few weeks old but illustrates my point Image
The hedge fund short is someone else's long. That long is institutional investors. It's very big. But that is not the important story. This unlike the ES charts which looked the same and were a choose your fighter Long Only Simps vs Hedge funds (which I got completely wrong) Image
Respect Long only Simps 🫡
Hedge funds short ES covered like mad. I was wrong. Image
But fixed income futures positions are quite different. While the long side of the positions are indeed levering up by long only asset managers the short side which is getting so much doomism is more complex
H/T @leadlagreport for this example Image
Why do hedge funds short bond futures
Speculation IS a real thing!

BUT also to hedge out interest rate risk on something they are long in the derivatives or cash market like:
Corporate and High Yield Bonds, Physical Treasury Bonds, Mortgage Bonds, Muni's, Converts, EM debt etc
For example let's say long only institutions bid up futures to lever up a bet. A hedge fund can buy the correspond US Treasury to that futures contract and take out a spread between the futures and cash markets. It's an arbitrage between the cost of leverage in the futures
Markets and the actual cost of leverage the hedge fund is able to achieve in their funding of the UST long position.

Now. It's possible that the hedge fund is purely speculative or it's possible that they own the bond and are using repo to finance the long and are short the
Futures. Let's go to the data. As this "historic" futures short has been built. Levered long positions have grown by half a Trillion dollars. Either that should be added to the long position of real money Image
Or should be subtracted from the short position of hedge funds who are doing the cash and carry arbitrage. I won't show all my data but just say that this is a complex topic and the signal in Fixed Income is pretty weak regarding TFF rates data the doomers are posting

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More from @dampedspring

Sep 4
Lightning network as a way for $MSTR to earn on its BTC holdings 101

I am a sucker. As you may know I have been obsessed with how MSTR or any other BTC treasury company can earn money on its holdings in excess of appreciation.

People including my friend @LynAldenContact
Whisper words that my old brain gives unmediated validity to because I'm a newbie dumb fuck on the topic. The Lightning network was one of those whispers.

My friend Claude and I did some work Image
Turns out the entire lightning network today has a fee generation of 10MN dollars. Maybe Claude is wrong but anyway seems reasonable.
Read 9 tweets
Sep 3
Fed Bills purchases to add reserves 101

As mentioned in a bunch of my writings Reserves are abundant today. Without changing QT on treasuries of 5BN and QT on mortgages which runs at roughly 20BN reserves will not be scarce for at least a year or more

BUT...🧵
Someday in the future reserves will be ample and have potential to become scarce.

Firstly let's deal with do reserves matter at all. In my DSR from last winter Image
Image
So reserves don't matter except to keep the daily transactions flow moving smoothly. So every bank needs reserves to process transactions and there needs to be enough systemwide reserves such that a bank with a temporary need can borrow reserves intraday from a bank with some
Read 19 tweets
Sep 1
Global Wealth vs medium of exchange 101 - just some thoughts

I've been thinking a lot about my understanding of the value and amount of currencies and their link to global wealth. I am sure there is great research on this topic and would be grateful for sources. Nonetheless
I suspect people are really confused about owning stuff (wealth) and mediums of exchange. I am, hence this writing.

In a world without currencies or any other medium of exchange wealth would still exist. Wealth isn't denominated in a currency. It's what assets you own.
For instance a person can own a property and the buildings built on the property. Another person can own a factory. Another person can own shares in a company that owns a property. Someone else can own debt issued by a property owner which if not paid back can give the debt
Read 15 tweets
Aug 26
MMT vs Old School impact of interest rates 101

These are my thoughts which could be completely wrong and have been formed by a fair amount but not exhaustive readings on MMT. Try to read this as a work in progress and a middle ground between two extreme views.
The question at hand is whether increasing interest rates is restrictive on or stimulative to economic activity.

Here's where you are going to get angry. My answer is "it depends"

Let's posit two worlds

1. A world with only private and no government debt

2. A world with
no private debt and only public debt.

In world 1. (this is the by and large the OG world) when a central bank increases interest rates above the level that they would otherwise settle in a (market based no fed world) the effect is to decrease demand for borrowing and increase
Read 13 tweets
Aug 23
Important charts to consider for rebalancing your long only portfolios 🧵

The stock market reminds me of Fred Schwed in 1940. In this case the companies that sell AI picks and shovels and AI services are the Brokers and everyone buying their services are the customers Image
The 1940 example rings true to me as "the customers" are convinced that the services provided by "the brokers" will let the customers beat their competitors. "Keeping up with the Jones" has motivated Americans as long as I can remember. Brokers tapped that competitive spirit
But of course only the brokers won. The customers just played a negative expected value game. It's been 85 years since this book was written and folks it still applies. "The brokers" have changed (though the OG's are even stronger) they have names like Saylor, Robinhood,
Read 16 tweets
Aug 7
Today as equities melt up I wrote down for DS Members the bull case for equities. Open minded exploration of bull and bear cases at all times is my process. Markets are almost always right so a bull case must exist. Here is mine 🧵
Let's give this a try. Reasons to be bullish stocks.

Stock prices change for a combination of fundamental and flow reasons.

Why should they go up.

Fundamentals

1. Accreting realized net income is almost always a positive and currently is running at 1% a month positive influence. As long as earnings growth is running at 12% this influence simply makes stocks more valuable as they retain earnings, buyback stock, and pay dividends.

All other fundamentals are expectations based. But without a change in expectations 1 dominates

However a change in expectations if it occurs is much more powerful than this monthly drift.

Expectations.

Consensus earnings growth expectations are for at least two years of ongoing 12% earnings growth. The realized is extrapolated out two years. While determining consensus earnings past then is prone to high errors in prediction in both directions. It's likely that a continued high rate of longer term earnings growth expectations is consensus

Corporate earnings are heavily driven by two major factors NGDP and deficits. NGDP drives top line sales because it is literally top line sales and deficits drive margin (Kalecki-Levy). Breaking those two factors down currently NGDP expectations are roughly 4.5% which is a combination of 1.5% rGDP and 3% inflation. Upside to NGDP expectation is not my view but if wrong real gdp could rise based on

population growth higher than expected likely driven by immigration cuz citizen demographics is highly predictable and slow moving

Productivity growth higher than expected which could be deregulation and/or AI delivering more than expected. (Expectations are likely pretty high but they could be too low)

Inhalation expectations are pretty stable and lowish while productivity gains which real growth depends on is most likely disinflationary lowering inflation expectations easy monetary conditions and leveraging up by private and public sector can offset that and keep inflation expectations high or even rising. (Thats good for stocks and bad for bonds). So there is a case for rising NGDP expectations and rising top line expectations for
Stocks.

What about margins. The big thing for margins is deficits. Currently and most frequently the biggest fastest moving variable for deficits are policy. In particular the most volatile component is tariff revenue. What I suppose is absolutely certain is announced tariffs have only downside from here. While around the margin I could imagine further tariffs assessment that seems less likely and small. Tariffs are pretty big. I suspect tariff expectations are much lower than current tariffs as they stand. Two reasons make me believe tariff expectations are lower than current assessment. 1. They may be declared illegal by the "radical left" circuit courts and that decision is upheld by Roberts /Barrett swing votes
2. The current assessed level is likely to be partly and meaningfully paid by US consumers and corporations which will reduce demand and raise prices and in aggregate be a net NGDP hit that will be pretty meaningful and destructive to the economy and stock prices.
For those reasons future tariff assessment expectations MUST be below current. However that expectation is FAR above tariffs being completely struck down or Trump voluntarily deciding to reduce tariffs a lot. So there is clear upside for tariff reduction which is pro NGDP and also increases the deficit which flows to margin. (Good for stocks and very bad for bonds unless intervention in bond supply follows). In terms of timing of the courts the circuit got the case last week and it should take a month for it to get punted to Supreme Court. I'm not a legal scholar but I read that the circuit court is highly unlikely to rule in trumps favor. It would be a huge negative surprise to markets if they rule in favor of Trump and a modest positive if they rule against based on Expectations. I have no idea how the Supreme Court rules and if 1/n
The Trump administration can or will try another tack for tariffs if ruled against including other forms or simply ignoring the ruling however if tariffs disappear the market and the economy is not priced for the outcome.

NGDP will surge and margins will surge. The dollar and bonds will crater and stocks and hard money will moon. The Fed will be on permanent pause or hike.

Flow

The current flow is like the current earnings accrual an up and to the right influence. Daily savings growth is positive and is almost always positive except in rare cases of negative employment. That daily savings growth is typically offset by net supply of stocks. But for the last 5 years public sector share count is falling as share repurchases heavily offset insider employee liquidations from various compensation schemes and issuance of IPOs and secondaries
Stock sales.
Except during the spac bonanza the daily net flow is bullish and probably at 25-50bp per month of appreciation I measure this with my daily passive flow indicators and it is clearly bullish and has been for 5 years at least.
The next topic is expectations of net supply and demand for equities. My measurements are consistent with high expectations that this net negative supply dynamic will continue at the current strong pace. In other words passive flow expectations are quite bullish. The dominant fast moving aspects for these expectations are pace of share repurchase, pace of savings growth, issuance expectations. Share repurchase pace
Expectations remain high but this one seems a downside risk that's not yet priced as
Capex expectations are very high and to fund CAPEX a choice may need to be made going forward by the hyperscalers who dominate the share retirement landscape. There is practically zero issuance and those expectations have no downside but a burst of issuance would be a negative surprise. That's not priced. How the world is going to finance its spend on hyper scaler and AI services is unclear and issuance by the rest of the equity market seems likely to me but is not expected. Lastly as mentioned the passive flow is up and to the right and may wiggle up (bullish) or down but only a sustained
negative jobs outcome will turn this flow negative.

Lastly in my overall assessment of equities is positioning. Having already addressed gross supply and demand above the next step is investor cohort supply and demand. What I would say
First and foremost is that this doesn't matter much over a
Quarter or year but matters a lot over any monthly or shorter time
Frames. It takes days weeks or at most months to correct position underweights and overweights of cohorts. Positioning data and sentiment data supports rapid rebalancing across cohorts. When breaking down the cohorts some things are clear. Over the last quarter AUM of cohorts has shifted pretty meaningfully. Leverage of cohorts has shifted as well. I'll also cover performance vs benchmark of cohorts and vol targeting more broadly across
Cohorts.

The biggest recent change is a shift from institutional AUM to self directed AUM That shift isn't a firing of imstitutional managers. That isn't seen in data as any "firing" is heavily masked by mechanical 401k and IRA
Contributions that still occur. But the self directed cohort is increasing its self directed allocation while keeping its institutional allocation flatish. Yes retail is buying.

Hedge funds which are the other cohort are pretty stable both in an AUM flow sense and a net exposure sense and are neither massively overweight or underweight shares.

Perhaps the most bullish aspect
Across cohorts regarding flow is vol targeting. Positioning changes from vol targeting has been bullish since April. Because of the rapid but choppy decline in vol and rise in portfolio diversification measures sustained levels will result in aggregate demand for assets as
Heavy filtering of vol changed leaves cohorts under desired leverage targets at 2/n
Read 4 tweets

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