Alpha Report: The gaps in the markets pricing

How risk premias and positioning are mispricing the macro regime

There is a consistency in markets to constantly misprice the macro regime because short-term momentum traders have become such a large portion of flows. The rise of machine learning and AI (both of which I extensively use in my models) have allowed managers to worry less about WHY things are taking place and more about increasing the speed and frequency of bets.

In other words, more and more people are chasing shadows of what is true instead of actually understanding WHY things are taking place. The entire financial industry has been divided into two TYPES of people: 1) Short-term oriented traders and 2) Doomers who use the excuse of a higher horizon for poor short-term management. (see the section of a book I posted here on this dynamic: Link).

A New Narrative:

The new narrative that is developing surrounds “excessive valuations.” Charts like the price-to-sales ratio are being floated around as the definitive piece of evidence for the stock market to top.

On top of this, bonds have been chopping in a range for years now:

This range in bonds is directly connected to the fact that a significant share of CPI components remains ABOVE 4%.

If you understand this dynamic in inflation and HOW it connects with both equities and bonds, then you will have a clear understanding of WHERE we are going. The purpose of this report is to break down these parts and map how they are impacting assets.

The Big Picture:

The reason WHY market narratives can be so confusing and disorienting for people who are actually trying to understand the world is because they reduce what is taking place to a single variable. For example, when we think about valuations in the S&P500, they are made up of multiple moving parts:

When you begin asking questions about each of these moving parts, you begin to realize it’s not as simple as the narrative originally portrayed it to be:

The act of asking questions is already difficult on a personal basis but if you take that into the public arena of social media, you will ALWAYS ruffle someone’s feathers. You will begin to recognize how the risk premias we extract in markets are directly connected to the TYPES of questions we ask and the difficulty we embrace.

All of this brings us to the question, WHERE are we right now?

The Tensions Of Growth and Inflation:

The resilience we have seen in growth to higher rates and the level of inflation has been THE primary macro tension framing the moves in risk assets.