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Let's simplify as we move into the weekend
I have written some reasonably technical articles this past week covering liquidity and flows (link). I want to zoom out a little and simplify as we head into the weekend.
We're ending the week with the S&P500 higher, bonds much lower, and the VIX hovering around 13. When I look at this setup with stocks and bonds, I think about it in direct relation to how I view inflation and unemployment.
Right now, inflation is elevated and unemployment is low. Stocks are high and bonds are low. Markets are positioned for a rosy summer. The key to understanding any changes that might take place is liquidity and positioning. I have not been outright short the index or taking any long bond positions yet. Why? Because we need to see the liquidity picture shift and correlations shift.
However, this doesn't mean I need to sit in cash. I have many strategies that run market neutral, which means I am not taking any directional views on the index. This type of setup is key because you always want to have a way to make money. A lot of money managers simply go from cash to fully invested instead of incrementally changing their exposure to different strategies that perform well in different environments.
This is highly intuitive regardless of the field you operate in. For example, you can drive your car in various weather or road conditions. There is a huge difference driving your car in the snow vs the desert. There is also a huge difference driving your car in LA traffic vs the countryside. It's intuitive that you would act different ways in different environments depending on the limitations (or advantages) your vehicle has.
So if you are operating in financial markets (or any domain), you want to constantly be monitoring your environment and always have predetermined ways of acting in various environments. This requires a high degree of intentionality which most people don’t want to put in. Half of benefiting from changing environments is having the mental fortitude to be intentional and make mistakes. The other half is competency which requires you to take accountability and ownership over your development.
I will finish with this: there are two major things that help you learn and iterate faster than everyone else:
First, taking risk: When you have skin in the game, you learn way faster and there is a drive out of necessity. I am always wary of people who don’t have skin in the game or who don't like to think about risk. All of us have to think about risk, it's part of life. We can delegate the decisions to someone who has more competency in a domain than us but that doesn't mean you should ignore risk.
Second, being around exceptional people speeds up your trial and error process: When you are around other exceptional people, they help you make fewer mistakes because you get to benefit from all the trials and errors they have made. This whole idea of “lone wolves” doesn't work when you want to operate at scale. Sure you can be a lone wolf and trade a small account but when you want to build something that lasts, you need people.
Part of the reason I started this Substack is so that I could connect with more people. There are multiple people I exchange trade ideas with every week that I met from this Substack. The Subscriber base is truly amazing!
As all of you know, my Twitter DMs are always open or you can email me at Capitalflowsresearch@gmail.com. Even if you just want to drop me a DM saying hi, I always appreciate the interaction.
I hope you all have a great weekend. (Be on the lookout for the S&P500 analysis I will be publishing over the weekend!)
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Thanks for reading!