Excess Returns
Cem Karsan and Andy Constan | PNL For A Purpose
Description
This episode features interviews with market experts covering topics like value investing, factor investing, macro, and options. The discussions touch on macroeconomics, populism, inequality, protectionism, globalization, historical trends in inflation and interest rates, and the current macroeconomic landscape. The Federal Reserve's role in managing growth and inflation is explored, along with the increasing volatility in global markets. Commodity and equity volatility are discussed, as well as the impact of interest rates and Treasury dynamics. The episode also covers Treasury issuance and its market impact, tapering QT and market expectations, deliveraging, and China's performance. The episode concludes with insights on portfolio volatility and a charity supporting cancer research.
Insights
The interviews are being released in pairs over the week following the live stream to raise money for Susan G. Coleman.
The podcast features interviews with market experts covering topics like value investing, factor investing, macro, and options.
One of the guests shares a personal story about losing his wife to cancer and emphasizes the importance of donating to support cancer research.
The guest predicts that the current period is at the end of the first inflationary push and expects significant growth followed by a decrease in inflation.
Election years historically show greater than 20% returns in markets with fiscal and Federal Reserve support.
Market structure differences between now and the 70s include the presence of derivatives and structured products.
Factors like US debt levels, detachment from gold standard, and government reaction functions are crucial in the current macroeconomic landscape.
Structural forces like technology, demographics, and globalization impact inflation trends going forward.
Technological innovation may slow down due to lack of investment compared to previous periods of rapid growth.
The Federal Reserve uses its language to try and control outcomes related to inflation.
Inflation can be self-fulfilling due to expectations, leading to increased demand and inflation.
The Fed is hesitant to admit structural inflation as it would have natural consequences on interest rates.
The Fed faces a high-wire act with a dual mandate of managing growth and inflation, influenced by political considerations.
There is a trend of increasing volatility in global markets, possibly influenced by interest rates and changes in investment strategies.
Structured product issuance and risk compression are impacting equity indexes' volatility levels.
Commodity volatility has been underpinned by selling puts, leading to compressed volatility over time.
Selling puts in commodities like oil and copper is seen as beneficial for riding the uptrend.
Equity volatility may not perform well in the long term, with short-term spasms expected.
Skew in the market is considered overvalued and likely to flatten going forward.
Elections are viewed as a hedged event that influences short-term market moves but may lead to positive support post-election.
Chapters
- Market Experts Interviews
- Historical Trends and Macroeconomic Landscape
- Federal Reserve's Role and Global Market Volatility
- Commodity and Equity Volatility
- Market Environment and Interest Rates
- Interest Rates and Treasury Dynamics
- Treasury Issuance and Market Impact
- Tapering QT and Market Expectations
- Deliveraging and China's Performance
Market Experts Interviews
00:00 - 07:01
- The podcast features interviews with market experts covering topics like value investing, factor investing, macro, and options.
- The interviews are being released in pairs over the week following the live stream to raise money for Susan G. Coleman.
- One of the guests shares a personal story about losing his wife to cancer and emphasizes the importance of donating to support cancer research.
- There is a discussion on macroeconomics, populism, inequality, protectionism, globalization, and historical trends in inflation and interest rates.
- The guest predicts that the current period is at the end of the first inflationary push and expects significant growth followed by a decrease in inflation.
Historical Trends and Macroeconomic Landscape
06:46 - 14:05
- Election years historically show greater than 20% returns in markets with fiscal and Federal Reserve support.
- Market structure differences between now and the 70s include the presence of derivatives and structured products.
- Factors like US debt levels, detachment from gold standard, and government reaction functions are crucial in the current macroeconomic landscape.
- Structural forces like technology, demographics, and globalization impact inflation trends going forward.
- Technological innovation may slow down due to lack of investment compared to previous periods of rapid growth.
Federal Reserve's Role and Global Market Volatility
13:43 - 20:43
- The Federal Reserve uses its language to try and control outcomes related to inflation.
- Inflation can be self-fulfilling due to expectations, leading to increased demand and inflation.
- The Fed is hesitant to admit structural inflation as it would have natural consequences on interest rates.
- The Fed faces a high-wire act with a dual mandate of managing growth and inflation, influenced by political considerations.
- There is a trend of increasing volatility in global markets, possibly influenced by interest rates and changes in investment strategies.
- Structured product issuance and risk compression are impacting equity indexes' volatility levels.
Commodity and Equity Volatility
20:21 - 27:47
- Commodity volatility has been underpinned by selling puts, leading to compressed volatility over time.
- Selling puts in commodities like oil and copper is seen as beneficial for riding the uptrend.
- Equity volatility may not perform well in the long term, with short-term spasms expected.
- Skew in the market is considered overvalued and likely to flatten going forward.
- Elections are viewed as a hedged event that influences short-term market moves but may lead to positive support post-election.
Market Environment and Interest Rates
27:17 - 34:36
- Skew in the market can impact declines and reactions to events.
- Historical events show that flat skew can lead to significant declines, though they tend to be viable dips.
- The speaker discusses the current market environment and expectations of a soft landing for the economy.
- Flow and positioning in the market are influenced by expectations of growth and inflation.
Interest Rates and Treasury Dynamics
34:18 - 42:03
- Market pricing reflects less cuts expected in 2024 and 2025, with only 100 basis points priced in for the next 20 months.
- Higher short-term interest rates and supply of treasuries are seen as factors that could slow down the economy.
- Long-term interest rates need to be well over 5% for a sustained period to kill inflation, potentially leading to a stall or recession.
- The Fed's Quantitative Tightening (QT) strategy has been criticized for not selling bonds off their balance sheet directly to the market like the BOE does.
- The Treasury's role in issuing long-term treasuries is crucial, impacting investors' choices and market dynamics.
Treasury Issuance and Market Impact
41:37 - 49:11
- The issuance of bills and coupons by the Treasury had varying impacts on the market, with interest rates increasing significantly after issuing a bunch of coupons in July.
- Market reactions to quantitative tightening and easing cannot be easily predicted or front-run due to their significant impact on financial assets.
- The QRA (Quantitative Regulatory Announcement) has become more relevant recently due to factors like quantitative tightening and the budget deficit, impacting asset prices.
- Expectations for upcoming Treasury announcements include keeping coupons the same, implementing a duration-neutral Treasury coupon buyback program, and the Fed likely delaying tapering QT for another meeting.
Tapering QT and Market Expectations
48:44 - 56:34
- The Federal Reserve is expected to delay tapering QT for another meeting due to concerns about the level of the RRP.
- There is a discussion about potential changes in Treasury issuance and funding as tapering happens.
- Twitter polls and political narratives are mentioned in relation to market expectations.
- Policy changes based on election outcomes could impact sectors differently, with both parties likely increasing the deficit.
- The speaker believes equities and bonds are likely to decline, but acknowledges that policy interventions or animal spirits could cause temporary rallies.
- Potential shifts in volatility across assets are discussed, with a focus on individual asset volatilities rising.
Deliveraging and China's Performance
56:14 - 58:01
- The speaker believes that 'Deliveraging' will happen slowly, not quickly, affecting the economy's weakening gradually.
- Portfolio volatility is expected to increase, although the speaker is not advocating for high volatility investments.
- The speaker finds China oversold and predicts it might outperform US assets in the coming year.
- The podcast guest supports a charity related to cancer research in memory of their father.