Despite the Fed tightening economic conditions, the economy has continued to power ahead, fueled by consumers with large excess savings. However, the dynamic is beginning to shift moving into the second half of the year We are starting to see cracks in the consumer as rates become felt throughout the economy, particularly for those most exposed to inflation

In a prolonged period of sustained low-interest rates and consistent economic growth, private equity/private credit has performed phenomenally. Funds can leverage investments incredibly cheaply, juicing returns. Because the assets are mark-to-book with an ever-increasing flow of new money, there appears to be very little volatility. The response from investors has been to steadily increase allocations into the asset class, chasing ‘low volatility’ and outsized returns.

A few thoughts on what has occurred over the past month.
First, there should be no head-scratching as to why the market rallied in the way that it did.
The Fed effectively released the floodgates of liquidity. Unfortunately, it was too late to save many pods and hedge funds that were swiftly marked for death following an unprecedented level of rate volatility related to the banking crisis bloomberg.com/news/articles/…

A thread of great sayings to help in life and trading
1. Fools try to prove that they are right. Wise men try to find when they are wrong. 2. That writer is the greatest who says the least and suggests the most.

3. Follow the vague and intangible, it will become definite and tangible

Portfolio management is quite dull most of the time - even if you are a high-frequency quant trader. It tends to be a ton of work, with very little actual "trading". Bottoms-up fundamental shops spend thousands of hours pouring over financial statements, modeling and meeting with management teams to try and find an edge

As we enter the new year, many reports have emerged that could be considered anomalous, such as retail sales and payrolls. However, the recent Personal Consumption Expenditures (PCE) number has brought into focus the message of the #bigflip. While many pundits have suggested that the current inflationary cycle is a short-lived phenomenon that will transition away, the reality is quite different.

The market has priced in, with virtual certainty, that the Fed will raise 25bps next week. So then, the real question becomes, what will Powell's language be like? Powell has been quite consistent in his "higher for longer" messaging, which is consistent with the dot-plot. Another way to look at this is the Fed is focusing less on the velocity of hikes and more on the duration

If you want to be successful at trading you need to understand 3 core things: Market dynamics, timing, and tools
Most start with tools (common stocks/options), try timing (when should I buy or sell?), and finally dabble in the market dynamics. Most fail...🧵 The rub is that many people become decent at one or two disciplines but fail to master all three. You may be great at understanding broad market trends and have a nuanced view of outcomes but don't understand how to effectively put on the trade.

The majority of the move in equities this year has been driven by the change in the RFR. That is now changing. Equities are pricing in a real earnings recession now, breaking the correlation with yields. Many pundits will soon claim that risk parity is back, time to pile into bonds! The trouble is that it discards the very real possibility that inflation remains higher for longer. Yes, inflation has undoubtedly peaked. But that doesn't mean it can't remain stubbornly high.

It is easy to get lost in the daily noise of the market. All you need to know going into next year is the following: 1. The entire move in equities has been due to yields rising. If we are in the "higher for longer" rates camp, which I certainly am, we will not see equities reprice significantly higher from falling yields next year

While tech layoffs have made plenty of splashy headlines recently, the reality is that tech workers are only a small fraction of the workforce Tech-related jobs are only ~3% of the total workforce. There is an argument that this cohort has significant spending power, which will drag on luxury retail (tend to agree here). But, it is still a fraction of the total workforce.

There exists an interesting divergence in narratives between fintwit and Main Street. Amidst a non-stop cycle of engagement seeking, narratives often become heavily regurgitated - resulting in a shorting of the “narrative cycle” 1/ In reality, these narratives often take a much longer time to play out - often leading main street to stick around for too long 2/

Monthly Macro Recap - October
Let's dive in🧵 US Equities outperformed, with the Dow Jones putting up one of its strongest months on record - driven primarily by UNH, GS, MCD, and AMGN. Meanwhile, Chinese tech equities were decimated following Xi's re-election.

We are going to have a better earnings season than many expect and the lagging nature of CB policy transmission will be fully revealed by the end of the year. Let's dive in👇 As we all know, a combination of government transfer payments and a massive cohort of early retirees ensured a tight workforce

The SEC has strict net worth/income requirements for what retail clients can invest in when it comes to alternative investments.
But complex structured products that almost no retail client understands the mechanics of - load the boat! These products are massive cash cows for banks on multiple levels. We have found that issuers typically take 8-10% off the top, without most investors ever realizing it!

Why has $BTC held up (decently) well over the last month while everything else has gotten slaughtered? A few thoughts🧵 First, we need to address why everything else has gotten killed and that is an adjustment upward of the market's expectations of inflation.

The vast majority of the downturn in equity markets has come from the rise in the risk-free rate, not from an adjustment to earnings expectations. While forward earnings estimates have started to come in, they are still significantly above pre-covid levels. The only way in which we escape another leg lower is if demand remains strong WHILE inflation simultaneously comes down. The case for inflation rapidly decelerating is weak.

Recency bias amongst investors has led them to believe that a 60/40 portfolio is a "balanced" portfolio, failing to realize that bonds are themselves a risk asset. In an inflationary bear market, bonds increase portfolio risk as seen this year. So then, how should long-only managers allocate?
For many, the best place to hide is in cash + trend following strategies.

I've had several people ask where to start when trying to create a macro framework. Below are the three areas I would focus on first with corresponding reading recommendations: 1. Study Market History
Read about past market cycles, bubbles, and major actors. Readings: The CRB Commodity Yearbook, The Myth of the Rational Market, Manias, Panics & Crashes, The First Tycoon

While commodities have recently sold off, there is a real and developing #foodcrisis that is not being seriously discussed. If you think the situation doesn't matter, you should read this thread👇 Indonesia exports roughly 300,000 tonnes of beef annually, amongst other proteins, and is facing the first outbreak of FMD in 40 years. The potential spread of the disease to Australia is a serious concern.
aljazeera.com/economy/2022/7…

Some important lessons I have learned when on a losing streak in trading (thread)
1. Don't revenge trade to try and get back what you lost
This will only heighten your emotions and typically leads to even bigger loses and creates a really bad habit bound to blow up your account. 2. Decrease the size of your positions
When you are on a losing streak, often it is correlated with heightened emotions and higher volatility. Smaller positions help dampen both.