Alpha Report: The Final Stage Of The Cycle

Duration risk, fiscal regime, and deregulation

We have entered a macro inflection point for the political regime and the market is attributing an increased amount of significance to it as positioning unwinds. This is pushing financial markets into a final melt-up that is likely unsustainable in its underlying drivers. This report will provide a full analysis of WHAT is taking place and HOW we are likely to move forward.

---

Big Picture:

The underlying mechanics of markets and their respective macro signals have been comprehensively laid out in the educational primers:

While market cycles always have high degrees of discontinutiy to the past, it is important to understand the CONTEXT for WHERE we are. The Long Good Buy provides a helpful mental model for the progression we see through many cycles.

While this mental model is highly simplistic, it is very helpful. In truth, there is a higher degree of complexity to stages in macro regimes that mechanically build on each other.

---

Where are we?

When we think about the macro regime, we ALWAYS need to analyze it from a duration risk and credit risk perspective. See the macro alpha primers on this distinction:

• Macro Alpha Primer: Credit Risk and Duration Risk and Macro Podcast: Macro Alpha Primer

In more simple terms, both risk assets (primarily sensitive to credit risk) and interest (primarily sensitive to duration risk) interact dynamically through the macro regime to create changes.

Where are we right now? For risk assets, we are in the “optimism stage” where valuation multiples are rising at an increasing rate. You will notice the Russell is at the top end of its valuation bands as growth has surprised to the upside over the last 3 months.

The same is true for the S&P500:

Within this macro regime of valuation multiples expanding, the election hedges have been an incredibly important driver. I have consistently laid out on the Substack reports that once these hedges unwind, we are going to rip with Russell likely moving to ATHs, NQ moving to ATHs, and ES likely hitting 6,000. This is exactly what we are seeing.

When you have the VIX gap down over 20%, this is pure pain in positioning being offsides as they monetize their hedges.

All of this is setting up for something bigger though.

---

The next stage and trade setup: