It’s worth asking: what are the attributes that have produced this secular bull market, and how likely are they to reverse? Let’s review.🧵 The most obvious attribute is the concentration risk from the mega growers. While history has shown that the top 10 or 50 stocks can dominate for a very long time, it’s also true that if these stocks go down, so will the major indices. Such is the math of capitalization-weighted indices. I’m not prepared to conclude that the Mag 7 have ended their reign as market leaders, but if they have it seems likely that the market as a whole will produce only modest (if any) beta for some time to come. /2

We often look to the bond market for clues when it comes to equity risk. Credit analysts focus on balance sheets, and they often sense trouble before the equity folks do.🧵 Today, there is a sense in the market that credit spreads are not confirming the correction in equities (i.e., they are not widening). That suggests that this is merely a “non-recession correction” and not something worse. What can history teach us? /2

While I wouldn’t put too much weight on this indicator, the iteration of the Presidential cycle in which the mid-term year (2022) is down, continues to play out nicely. We are now in “year 5” (if that makes any sense), and that year has been down on average for the first six months. It suggests a modest but multi-month corrective period.🧵 Given how few observations there are for this indicator and that we are now three years beyond the mid-term, I would take it with a grain of salt. However, one of the occurrences was the 1966 mid-term, which is interesting because the 1966-1968 soft landing remains a relevant analog to the soft landing of 2022-2024. /2

The bullish price action of gold and #bitcoin has sparked a lot of conversation about monetary inflation. In that conversation, the difference between the quantity of money (money supply) and the price of money (price inflation) often gets conflated. Let’s unpack this a little.🧵 It’s true that when the money supply grows faster than GDP, price inflation often follows. Not always, but often, as the chart below shows. /2

At what point do we have a legit bubble on our hands and does this all end in tears? Nobody knows, of course, but in my experience, excessive valuations only play a role after an earnings catalyst has been triggered.🧵 If the trade is crowded (as I’m sure this one is), even the slightest hint that the second or third derivative of estimates starts to falter could cause a shakeout. Based on the chart, we don’t seem to be there yet, but on a price-to-free-cashflow (FCF) basis (below), valuations are getting up there. /2

How far is too far for the Mag 7? When we consider the market weight of the Mag 7, we see that we are approaching the extremes set by tech/telecom in 2000 and energy/materials in 1980. And that’s for only seven stocks!🧵 Why does it matter what the Mag 7 does? Because they are so big that if they ever go down in absolute terms, the major indices will likely follow, even if the majority of stocks keep going. /2

My sense is that we are in the 7th inning of a secular bull market which began in 2009. I know many technicians (including my esteemed colleagues) use a later start date (2013), and they may well be right. But I like my method in that it uses multiple approaches that yield the same conclusion.🧵 Per the chart below, I use the deviation from the 150-year trendline as the guide to start the clock. On that basis the current regime began in 2009 (and was confirmed in 2013), and the previous three started in 1982, 1949, and 1920. /2

At 3.5%, the iERP sits at the 90thpercentile of historical valuations (going back to 1900). Valuations are notoriously ineffective in predicting short-term returns, but at extremes they matter (0-10th percentile and 90-100th percentile)🧵 Below we can see that the 10-year forward return (CAGR) has a right tail (very low valuations produce above-average returns) and left tail (very high valuations produce below-average returns). In between those tails, it’s all noise./2

With more growth, ongoing deficits and a Fed that is no longer funding the trillions in deficits that the Treasury is financing, the term premium is understandably rising. It’s been suppressed by QE (quantitative easing) and zero interest rates for the past decade-plus, but those days appear to be over🧵 A rising term premium is likely to cause occasional rate tantrums that push yields to 5%, as we have already seen repeatedly since 2022. When I adjust my bond model for a more normal term premium (100-150 bps), it’s easy to see 5% becoming the new 4%. /2

If there is one thesis that I have high conviction in for the coming years, is that the US is on a path towards fiscal dominance. With the Fed and other central banks no longer the buyer of first and last resort, it seems plausible that the term premium might rise in the months and years ahead.🧵 If you are skeptical of that view, take a look at the chart below and tell me what compensation investors might demand to fill the $10 trillion gap between the federal debt and the Fed’s balance sheet. As of last week, the term premium was 22 bps. It’s higher than it has been, but it still seems low to me. /2

One of the reasons for this restrictive stance (presumably) is that the banking system remains awash in reserves, at a time when fiscal policy is expansive and the central banks around the world are cutting rates.🧵 In the US, bank reserves are down from their COVID peak of $4.19 trillion, but remain higher than before the pandemic. /2

The narrative is clearly evolving from focusing on the inflation side of the Fed’s mandate to the growth side, and this comes at a time when the seasonals are reaching their weakest point and the mega growers continue to wobble.🧵 The next easing cycle is only a week or so away, and the main question is whether the Fed goes with jumbo (50 bps) cuts or the garden variety 25 bps. /2

In absolute terms, the market is in decent shape, with 78% of stocks in uptrends. That’s higher than a few weeks ago, even though the index is lower.🧵 The comparison to the narrow leadership of the late 1990’s is inevitable, but that cycle was much narrower than this one. This gives me some comfort that the current rotation doesn’t have to end in tears the way it did two decades ago. That was a bubble, but this one is not. /2

Put this in the “I thought I’d seen everything” department: the 13 week correlation between the S&P 500 cap-weighted index and the S&P 500 equal-weighted index is now 36%. That’s between two indices that have exactly the same constituents. It’s normally 99%, as one would expect🧵 It’s a good illustration of just how bifurcated the market has become, and what can happen when that inevitable mean reversion finally kicks in. /2

For the markets, it was more of the same last week: the winners won while the rest of the market spun its wheels. 🧵 This continues to be a tale of two markets, with the mega growers breaking away from the pack to such a degree that it becomes nearly impossible for the rest of the market to keep up, let alone outperform. It’s making me rethink the bullish broadening thesis. Perhaps the broadening can only happen in a down market, at least in relative terms. /2

With the debt dynamic worsening around the world, and central banks no longer funding that debt (at least for now), the direction of the term premium for bonds remains a question mark. With the correlation between stocks and bonds now positive, what role do bonds play in a diversified portfolio? 🧵 There are certainly reasons to own them: real yields are now positive and the math of owning bonds is far better now than it was a few years ago. But since 2022 they have not provided the relative balance that the 60/40 paradigm had generally provided since the late 1990’s. /2

We are now in an era of fiscal dominance, with deficits running at 7% of GDP with no end in sight. The US is now spending more than a trillion dollars on debt service, and projections from the Congressional Budget Office (CBO) give little reason to expect this to improve. The big question is what role the Fed will play in this new regime.🧵 For now, the Fed is on the other side of fiscal policy, keeping monetary policy restrictive while fiscal policy is loose. Debt levels are high, although relative to GDP they are below the 2020 extreme. /2

In my view, bitcoin is exponential gold and an aspiring player on the store of value team. My work suggests that the price of bitcoin is driven primarily by the growth in its network, which is in turn driven by bitcoin’s unique scarcity feature, as well as the monetary and fiscal policy cycle, and of course sentiment.🧵 As the chart shows below, Bitcoin and Ethereum’s S-curve have followed the path of many technological developments throughout history. It’s all about the network. /2

What’s behind the secular bull market of the past 25 years? Several factors, including falling interest rates, rising margins, and de-equitization via M&A and share buybacks. 🧵 The buyback era started in the mid-2000’s and has been a powerful driver of valuations. Buybacks lead to a higher payout ratio for earnings. Like a bird in the hand, a higher payout ratio commands a higher P/E. /2

In terms of the secular trend, I think we are in the 7thinning. Secular bull markets are prolonged super-cycles spanning a decade or more and producing above-trend returns.🧵 In my view we’ve been in a secular bull market since ‘09, not unlike the ‘49-‘68 and ‘82-‘00 regimes. Here we see how closely the current super-cycle has tracked those two. There was also the ‘20-‘29 secular bull market, but it went too far too fast, and like Icarus it got its wings burned prematurely. /2

It’s been a while since we have seen the reflation playbook in action. For those unfamiliar, it involves a monetary pivot, a weaker dollar, and a rally in risk assets led by commodities and EM equities.🧵 We had several episodes of this in the aftermath of the Global Financial Crisis (GFC), and they were typically sparked when the Fed capitulated on rate hikes or QT (quantitative tightening), while China was stimulating its economy. /2