Mapping Macro Liquidity and How AI Is Changing the Transmission Mechanism
Why 80 percent of returns come from macro, how AI is functionally injecting credit into the economy without a bank, and why real rates 30bps from negative is the chart that determines the next leg
Today, Jaymes and I mapped the entire macro liquidity framework, how AI is changing the transmission mechanism, and why this credit cycle melt up has more left in it than positioning is prepared for. Real interest rates are 30bps from going negative and AI is retooling both the financial market and the underlying economy at the same time.
See the full thread on the credit cycle I referenced in the video here: LINK
LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. 80 percent of returns in most asset classes come from macro. Every individual stock and the broad market decomposes into market returns, sector returns, and fundamental returns. Market and sector returns are macro driven. Fundamentals stack on top. If you can map the macro regime correctly, you are already capturing 80 percent of the available return before you even pick a name. That is why the entire framework starts at the macro level and works down.
2. Melt ups are not driven by sentiment or euphoria. They are driven by liquidity and credit. Sentiment can move a single low float stock. It cannot move an entire market. What drives broad based melt ups is the combination of financial market liquidity expanding and credit being injected into the underlying economy at the same time. Both of those are happening right now, and AI is the reason both pipes are open simultaneously.
3. AI is functionally injecting credit into the economy without a bank. That is the single most underpriced macro variable. When AI lets you spin up a company, market it, and build a brand with less upfront capital, that is a liquidity impulse. You need less capital to start a business, which is a supply and demand shift in capital itself. On the financial market side, 0dte options and the explosion of new ETFs are doing the same thing at the trading layer. Both sides are accelerating at the same time.
4. Real interest rates are 30 basis points from making a negative print. That is the chart that determines the next leg of the melt up. When real rates go negative, holding cash mechanically loses purchasing power. Large players borrow and deploy because they get paid to take debt in real terms. This forces capital systematically out the risk curve into small caps, high yield, and the riskier assets like crypto. The 2021 setup was negative four percent real rates. We are not at those levels yet, but the path is set.
5. Money is not a thing. It is a web of asset liability relationships. Your dollar is your asset and the government’s liability. Your bank deposit is your asset and the bank’s liability. A treasury bill is your asset and a liability to the government. There is no fixed definition of money because there is no one enforcing it. Once you understand money this way, you stop thinking about price in nominal terms and start thinking in real purchasing power terms.
6. Every asset has either duration risk, credit risk, or both. That is what drives the risk curve. Duration risk is the uncertainty of real purchasing power over time. Credit risk is the uncertainty of nominal repayment. Long term treasuries are pure duration. High yield bonds are pure credit. Equities are a mix. When you can decompose every asset into these two factors, you can map exactly how it moves in different macro regimes.
7. Macro liquidity is the price of money times the quantity of money. Both are changing right now in the same direction. Price of money is interest rates, especially real rates. Quantity of money is bills, reserves, private sector liquidity, and government spending. Most liquidity indexes mix these together poorly and miss the destination of the flow. The yield curve regime is the cleanest synthesis of both because the curve is itself an input into liquidity and the destination of capital across the risk curve.
8. Crises happen through asset liability mismatches plus an FX or rate shock, not through euphoria fading. The textbook view of expansion, euphoria, contraction, panic misses the actual mechanism. Crises occur when the asset side and liability side of the system get out of alignment and then a rate or currency move shocks the imbalance into repricing. Right now, the data shows no asset liability mismatch. Mortgage delinquencies did not rise through one of the fastest hiking cycles in history, which is the cleanest signal that the system is not mismatched.
Slide Deck and Playbooks
Here is the slide deck from today’s livestream:
Tomorrow’s Livestream: The Interest Rate Complex: Risk Reward Across the Curve, Inflation Risk, Curve Regimes, and the Impact on Equities
Tomorrow, I will do a comprehensive breakdown of the interest rate complex and the risk-reward of rates across the curve. I walk through inflation risk, the curve regimes, and the specific transmission into equities. This is how you read the rate complex in real time and connect it directly to positioning.
TOMORROW’S LIVESTREAM: LINK
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Another good one CF. Thanks for doing these talking point summaries. Really appreciate them!
"AI is functionally injecting credit into the economy without a bank"
Interesting angle. Didn't think about that. But on what scale does this work? I think this applies to small companies, Indi hackers. Is it enough to meaningfully lift liquidity? Any way to quantify the effect?